Triton Valves is a BSE listed small cap company. The company's products are pretty interesting..
Intuitively, one might think that this would be a very good business due to following reasons:
1) The business requires massive scale. For competition to come in, such scale would prove to be a BIG entry barrier. (Imports, aka Chinese goods would surely be a threat)
2) For a tyre manufacturer (Triton's customer), the valve cost is not a large component of total cost (In FY11, Triton's per unit selling price of a valve was just Rs.14.35). So a small increase in price would not be a huge deal for the tyre manufacturer.
3) Due to all these, Triton should be having pricing power, assured and sticky business and growing customers.
Sounds like a very interesting business and opportunity right? I thought so too and glanced through the company.
Well, the numbers show a totally opposite picture. So this post is not only about Triton but also about the importance of numbers in analysis and investment decision making. I personally feel that a good look at the numbers is very essential to get comfort level while investing in a company.
FY04 onward, Triton's sales have grown at a 17.5% CAGR (all numbers in Rs.Cr)
The profitability, however, shows a totally different picture. Operating profits grew at a CAGR of 9.3% and PAT grew at a CAGR of 5.4% only
Cash flows have also shown a deteriorating picture
As a result, the balance sheet has gone for a toss, with debt piling up..
Inventory CAGR (25%) and debtors CAGR (20%) has been much higher than sales CAGR (12%). So every time the company's sales increased, the working capital requirement increased more than the increase in sales, resulting in perennial need of cash for funding working capital.
So what was the cause of all this deterioration? Lets see..
The selling price per unit of Triton's products has grown at a CAGR of 5.2% and 1.7% respectively.
But the raw materials price per unit has grown at a much higher CAGR of 15.6% and 11.5% respectively.
So as raw materials prices rose, Triton was not able to raise its products ka selling prices proportionately, leading to falling margins. In FY04, raw materials consumption was 38% of sales. By FY11, it had become 64% of sales!
Now what will happen if you put more money into the business and expand capacity, but the margins keep going lower? On the expanded capacity, you will earn lesser percentage returns. The return ratios suffer. ROCE, RONW have dropped over the past 6 years.
So what conclusions can we draw from the data?
- Triton does not have pricing power. The growth in selling price per unit has not even been in line with the growth in the raw materials price per unit. This has caused a hit on margins.
- Hit on margins, coupled with need for expansion every 2-3 years means that even the new assets deployed will generate lower returns. Further, these assets need to be financed by debt, since working capital also blocks cash. This has led to balance sheet deterioration too.
- Customers have basically squeezed Triton on two major fronts; product pricing, working capital. And as I have often observed, margins once sacrificed become virtually impossible to regain.
So, the numbers say that (till now, at least..lets not talk about future right now) Triton is not an exceptional business, has no moat or pricing power of its own and will earn super profits only due to luck (e.g. sudden fall in commodity prices). Well, thats just what the numbers say.. What do you say? :-)
Cheers and happy investing!!
P.S. My apologies if I let loose the 'analyst' in me on all you unsuspecting folks! :-D
P.S. Part 2: This is just a number crunching analysis. This does not reflect upon the quality of management (the Gokarns are decent folks, I think) or what they have managed to achieve in really trying times, over the last 7-8 years.