Goodwill - How big margins are gained

Goodwill is concept that many think have intangible effect on a company sales and its reputation. No wonder companies that build a name for themselves and invest heavily into building their company brand have always been able to sustain their growth and have had stable earnings over the period of their operations

An example that we would want to show to you of this on the grass-root level is a case of the most loved Chocolate for about 2 whole generations - Cadbury Gems

From Cigarette Vendors to Pan shops to Malls, the distribution chain being highly integrated and large, The Company having changed its name from Cadbury India to Mondelez India Foods Limited in 2014, enjoys a market share of over 70% in the chocolate confectionery business.

If you go to any grocery shop, today you will get Gems as a product sold at all of these stores. There are 3 packs it usually comes MRP (Maximum Retail Price of Rs. 5, 10 and 20. Now a normal customer, would not care much about the price because it mostly about their children so prices are ignored in these situations.

Looking at the Packs in detail though shows that in terms of the contents in the Packs:

Rs. 5 - Plastic Cover , 8.9 grams of Gems
Rs. 10 - Plastic Cover, 18.69 grams of gems
Rs. 20 - Cardboard Cover, 18.69 grams of gems, Special Tazo/Playing card/Tattoo

Noticing this, see that there is pracitically no difference between the 10 and 20 rupees packs in terms of the number of gems of the contents, except that to woo the children(the main customer target market), the company gives out only an extra added item which might not even cost them as much but still the company has hiked the price of it to Rs. 20.

This shows the pricing power it has on its customers as the company is aware that their target market(children), will influence the buyer(parents), to make them ignore the price difference and make them buy the Rs. 20 packet because of its product design. The company does this at barely no extra cost and thus is very successful at manipulating its customers to buy its extensively high margin products.

The point to note here is that this can happen only when the company has built a brand and reputation that is so strong that it gives them the opportunity to use the market in such a way. There monopolistic stance in the market segment also adds to this element as customers do not have choice of products and thus are less price sensitive in terms of their demands.

Inox Wind Ltd.- Huge Potential company

Company Snapshot:

The company is engaged in manufacturing of wind turbine Generator and other allied components and is one of India’s largest WTG manufacturers

Business Model:
1) Selling of WTG and allied Equipments 

2) Turnkey Projects 

3) Operation & Maintenance

Capacity addition:
The company initially had a capacity of 800 MW and added another 300 MW of capacity in Q4 FY 15 (1100 MW). Expected to be enhanced by 1600 MW in 2016
WTG Model: WT2000DF (2 MW) has only 1 range (Ensures power generation in low wind conditions)

Industry structure: (Barriers to entry)
The Industry has a oligopolistic structure wherein top 5 players control the market, Inox winds is comparatively newer than its peers(Gamesa,Regen,Suzlon ,Vestas) and was started in 2009-10 but started its Business operations in real terms only from 2010-11 and already has around 12% of the market share which is commendable.

Business Model: (Recurring Model)
The Business model of the company is shifting from Turnkey to selling WTG and other equipments and is one of the main reason why the company will enjoy higher EBITDA margins .The Company used to cater mainly to its group companies in the beginning but now the company makes close to 99.9% of its revenue from catering to TPA
It is also a very important factor to note is that the company also will be responsible for operation,service & Maintenance of Windmills which it has commissioned (Turnkey) which means recurring revenues .And the Concall says that the company will enjoy high margins of 30-40% from that.

Technology Partner: (License)
The company has partnered with AMSC Windtec Austria which is one of the leading Technology players globally and had close to 15 GW installed across the world based on its technology with whom the company has a perpetual exclusive license to sell 2 MW WTG in India and non-exclusive license for export

Management Background:(Past track record)
Management has track record of running successful companies (Gujarat Fluoro-chemicals and Inox Leisure)
Strong Promoter holding 85.61%.

Government Initiatives:
The new Modi government has set an ambitious target of 60000 MW and the current installed capacity is 22000 MW approx. (Hug gap to cover) Also Investment in Wind Initiatives has been tagged as CSR which adds to the benefits for this sector as 2% CSR spend is mandatory from April 1 2014

Accelerated Depreciation:
This means that a corporate which makes investment in a wind mill can write-off 80% depreciation in the first year which saves a lot of taxes (This initiative will further encourage Business Houses and also HNI’S and may boost the demand for WTG’s and allied components)

RPO: (Renewable Power Obligation)
According to this scheme every state government should have some component of its Electricity generated from Renewable source which adds to the advantage

Company Financial Highlights:
Sales Growth CAGR-5 YEARS = 148 %
Net Debt= 150 crores approx. (This Industry is very capital intensive and the health of a company’s balance sheet is considered very important, Balance sheet of Inox looks good)
FY 15 Sales =2709 crores
Solid Order Book: The Company has revenue visibility till FY 17 and is already sold out for FY 16
ROIC = 27-30% (FY 15)
ROE=32.6 % (FY 15)
The company has 700 crores of cash in its Balance sheet
YoY EPS Growth =124.1%
FY 15 D/E-=0.6

The company does a look a buy to us at current levels of 350-420.

Fundamental Analysis

What we see today is the world getting richer and everyone is creating wealth or attempting to create it but what we do not realise is that when we create wealth, we create money, we create value and we see value in money, when it's actually not there. We want to buy companies but they do not want to research on what the company does, what the company aims to achieve and has it achieved it in the past.
To do this, we read there annual report and try to assess whether what the company has been doing is efficient enough or not. Here lies the actual true intrinsic value of the company and thus this is what we need to see.
Our books have taught us wrong this is not a race for money this is a race where we try to find the potential of the assets owned by the company and thus we are analysing their book value which is very important as that will tell us the real value of the firm

This is what we need to remember and this is the first lesson when we do a fundamental analysis of a company. We need to see value, we need to see the assets and we need to assess whether that value can be generated over a period of time by those assets. This, in true essence is Fundamental Analysis.

Major Companies in the Construction and Contracting Sector (EPC, PPP, BOT)

Basics

This is one of the most promising industries in the Indian market. Even after a lot of problems that the industry has been facing since the 2010, it is still a promising sector for the simple reason that as long as the country is growing , there will always be a need for better infrastructure, services, transport and real estate. So the demand is growing, moreover with the demand for the better conducive environment for business increases, the bottlenecks for the businesses will soon be reduced through effective policy formulation and follow-up corrective measures.

Market Capitalisation

Here is the list of basic details for all of them in terms of their market capitalisation and other details are available on the site. All of the companies mentioned below are listed companies in the Construction and Contracting Sector (M.Cap. - Above 1000 Crores)

• Civil

COMPANY NAME	CMP	EPS TTM	PE Ratio	CPS TTM	PC Ratio	52 Week H	52 Week L	Dividend	Market Cap
NCC	81.5	2.01	40.55	4.02	20.27	118.2	34.2	0.25%	4,530.84
Ashoka Buildcon	176.8	7.6	23.26	10.56	16.74	205.4	110.05	0.85%	3,307.53
Hind Constr	25.9	0.89	29.1	2.54	10.2	49	20.05	0%	2,363.35
J Kumar Infra	674.25	29.29	23.02	43.98	15.33	761.25	282	0.56%	2,172.85
Unitech	8.07	-0.06	-134.5	-0.03	-269	35.5	6.5	0%	2,111.35
Simplex Infra	378.65	12.62	30	40.27	9.4	508	206	0.13%	1,873.27
Mahindra Life	436.7	56.88	7.68	57.55	7.59	659	401.3	1.37%	1,791.13
KNR Construct	524.75	25.96	20.21	45.18	11.61	560.4	200	0.19%	1,475.78
Ahluwalia	207.7	9.57	21.7	12.74	16.3	293.8	99	0%	1,391.33
Man Infra	45.35	2.04	22.23	2.45	18.51	52.15	21.1	2.98%	1,122.41
MBL Infra	515.25	38.67	13.32	46.1	11.18	659	257	0.58%	1,067.97
Gammon Infra	11.08	-0.19	-58.32	-0.17	-65.18	20.85	9.05	0%	1,043.36
ITD Cementation	668.75	-43.18	-15.49	-24.22	-27.61	853	309.7	0%	1,037.62

•  Housing

COMPANY NAME	CMP	EPS TTM	PE Ratio	CPS TTM	PC Ratio	52 Week H	52 Week L	Dividend	Market Cap
Ashiana Housing	243.5	4.46	54.6	5.23	46.56	327.3	113.7	0.21%	2,492.27

• Real Estate

Company Name	CMP	EPS TTM	PE Ratio	CPS TTM	PC Ratio	52 Week H	52 Week L	Dividend	Market Cap
DLF	120.05	5.27	22.78	5.59	21.48	233.85	100	1.67%	21,396.58
Prestige Estate	250.15	11.05	22.64	12.17	20.55	323.7	193.75	0.60%	9,380.63
Oberoi Realty	278.4	9.28	30	10.3	27.03	334	203.05	0.72%	9,139.20
Godrej Prop	248.55	6.42	38.71	6.85	36.28	309	215.15	0.80%	4,955.04
HDIL	93.65	5.39	17.37	5.55	16.87	143	58.9	0%	3,923.97
Sobha	362.7	20.3	17.87	27.33	13.27	536	351.45	1.93%	3,556.78
Omaxe	135.2	2.19	61.74	2.88	46.94	143.4	120.05	0.37%	2,472.82
Indiabulls Real	57.6	0.54	106.67	0.65	88.62	101.6	41	5.21%	2,447.87
Puravankara	79.1	3.6	21.97	4.07	19.43	133.9	61.5	2.43%	1,875.85
Sunteck Realty	273.65	11.86	23.07	11.97	22.86	371.8	205	0.37%	1,723.07
Kolte-Patil	212.2	5.76	36.84	6.27	33.84	240	123	1.46%	1,607.94
Brigade Ent	137.3	6.21	22.11	14.37	9.55	179.6	115	1.46%	1,548.08
DB Realty	63.15	-1.13	-55.88	-0.92	-68.64	110.9	51	0%	1,536.18
Anant Raj	37.7	4.24	8.89	4.96	7.6	79.85	31.7	0.64%	1,112.51

Thus we need to look into these companies in the sector to understand the performance and CSFs of the industry and its sub sectors through analysing such companies.

A key driver of the economy, Infrastructure is highly responsible for propelling India’s overall development. The industry enjoys intense focus from the top officials of the Government for initiating policies that would ensure time-bound creation of world class infrastructure in the country. This sector includes power, bridges, dams, roads and urban infrastructure development.