Shriram Transport Finance: Wonderful Business at Reasonable Price

As we witness extra ordinary volatility in the market both ways, it is indeed very interesting time for value investors. As described by Seth Klarman, volatility is the friend of value investors that creates fertile ground for avid stock pickers. Warren Buffet is one such master stock picker who has repeatedly invested in some of the greatest businesses on earth in turbulent times to reap gigantic benefits from such investments. Mr.Buffet always focused on investing in companies that are engaged in business that is easy to understand, enjoys sustainable competitive advantage (moat), generates high return on equity and is run by competent management. In my opinion, Shriram Transport Finance (STF) fits very well in all the parameters.

STF is India's largest commercial vehicle finance company established in 1979. STF is also one of the largest asset financing NBFC in India with network of 488 branches and service centers. STF has established a unique business model whereby it finances the purchase of pre-owned (used) trucks by small truck operators. STF has, over a period, developed this as its niche as banks are reluctant to lend to this class of borrowers due to lack of credit records and perception of higher risk. STF has more than 25% market share in pre-owned commercial vehicles which makes it the largest player in this segment. What is really heartening is that STF is leveraging its strong brand recognition, distribution network and knowledge base of small truck operators to create new business models such as auto malls and sale of refurbished vehicles (similar to used certified cars) that will create synergies between various business segments and diversify its revenue stream. 

Now let us look at the some critical factors that investors like Warren Buffet and Charlie Munger look for while making investment decision.

25 Pearls of Wisdom: Great Quotes From Value Investors

Good quotes have certain characteristics that makes them special. They are short, represents central idea/tenet of the subject and conveys the same idea very effectively without getting verbose. True beauty of great quotes lie in the impact it creates due to its simplicity! In my readings on value investing, I have come across some great quotes from equally great value investors/economists. I would like to share a few of them here as they represent some very powerful and central ideas in value investing that has the ability to prevent one from digressing from the path of value investing. Here they are...

“Price is what you pay; value is what you get.” – Ben Graham

“It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”     –Charlie Munger

“Activity is the enemy of investment returns.” – Warren Buffett

“In the short run, the market is a voting machine, but in the long run it is a weighing machine.” – Ben Graham

“The stock market is filled with individuals who know the price of everything but the value of nothing.” – Phil Fisher

“It is impossible to produce superior performance unless you do something different from the majority.” – John Templeton

“Markets can remain irrational a lot longer than you and I can remain solvent.” – John Maynard Keynes

“The trick of successful investors is to sell when they want to, not when they have to.” – Seth Klarman

“We are big fans of fear, and in investing it is clearly better to be scared than sorry.” – Seth Klarman

Oriental Carbon and Chemicals: Keeping a close eye

As I dig deeper into the market to identify undervalued businesses that have some kind of sustainable competitive advantage for at least next 10 years, I am coming across some very very interesting opportunities available in the Indian market. It is startling to know that some of these businesses are not only enjoy no.1 or no.2 position in India but also enjoy no.1 or no.2 position in the world in their respective businesses. To name a few Vinati organics (world's largest producer of isobutylbenzene, second largest producer of ATBS), Gujarat Reclaim  & Rubber (Asia's largest reclaim rubber producer) and Oriental Carbon & Chemicals (India's only manufacturer of insoluble sulfur and world's second largest producer of insoluble sulfur). What is more amusing and intriguing is that these companies are available at very reasonable valuations (less than 10 PE) and have fairly strong balance sheets, decent growth prospects and high profit margin.

Oriental Carbon & Chemicals Limited (OCCL) is India's only manufacturer of insoluble sulfur and second largest manufacturer in the world. The company is a J.P.Goenka group company established in 1978 and first plant for insoluble sulfur was established in 1994. Insoluble sulfur is amorphous form of sulfur having polymeric form that is insoluble. Insoluble sulfur is required in vulcanisation of rubber and hence is used by all tyre manufacturers. Company has two facilities located in Haryana and Gujarat. Haryana plant, after debottlenecking, has capacity of 14,500 MT and recently commissioned plant in Gujarat has capacity of 5500 MT and is likely to go up to 11000 MT by Q4FY12.

Business Quality: Insoluble sulfur (IS) market operates in oligopoly due to technological barriers and R&D efforts required to develop certain properties for the product. Solutia Inc is the world leader (Crystex brand) in this market with close to 75% market share. OCCL was late entrant into the market but due to constant R&D and quality standards it has gained close to 10% market share. Company derives 60-70% of its revenue from exports.

OCCL is the only supplier of IS in India and hence enjoys virtual monopoly in Indian market. Company has enviable list of clients in the form of both Indian and International tyre manufacturers such as Apollo, Ceat, MRF, Bridgestone, Continental, Kumho, Goodyear. OCCL has been primary supplier to Indian tyre manufacturers and alternate supplier to international tyre companies. However, recently OCCL has introduced some value added products which has opened up doors for increase in demand from international tyre manufactures.