Saturday, July 7, 2012

Thangamayil - Multibagger


A great sage once wrote, “Great prophets like Christ and Krishna come to earth for a specific and spectacular purpose; they depart as soon as it is accomplished. Other avatars, like Babaji, undertake work which is concerned more with the slow evolutionary progress of man during the centuries than with any one outstanding event of history. Such masters always veil themselves from the gross public gaze, and have the power to become invisible at will. For these reasons, and because they generally instruct their disciples to maintain silence about them, a number of towering spiritual figures remain world-unknown.”
Manish Dave, my friend is one such investor who is more seasoned yet humble than other famous fund managers we see at Smartmoney, MorningStar or Gurufocus or who saturate CNBC with noise all day.

Manish Dave's management meet and research notes below. 
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Thangamayil sells jewellery, and as a stock it is a GEM too. 
Management is god loving, not god fearing and very ethical. This is my first concern as an investor for any company. Even when they were small not a milligram of gold sale was left unreported. This was told by people other than in their management.
Employees admire, not fear, their bosses. I could see employees extremely friendly with customers and extremely friendly with me as an investor. They were very open to any of my questions and there was nothing to hide.
TMJL's operation at existing stores is like a well oiled machine.
Management is very much focused on Jewellery business. They don't have any other business and they don't want to do anything else. I could see their passion for gold and jewellery. On top of that, tuning amongst family members is good. So management bandwidth for growth is there. One of MD's sons is planning to study gemology and not engineering is a good sign which shows that they are committed to the business.
They have barely covered 50% of TN and many pockets even in the covered area are available. So for their growth, sky is the limit. After TN they can go to other states. They will be able to grow as far as the eye can see. Compared to other retailers who spread out at far places, logistics is easier and less expensive for TJML. Plus marketing is also cost effective.
Their main business is gold and it going to remain that way. Diamond in small towns will not replace gold. Cultures don't change that easily and TMJL understands that.
Company management is traditional, yet open to new ideas. They are making full use of technology weather it is alarm system, video conferencing or IT. Security systems are robust. Management is very open to new ideas and I saw no hint of ego to accept new ideas. I suggested few things, they liked them and MD immediately asked relevant employees to implement them.
Stores are spacious and full of choices. I think the best part for the customer is wide variety and value for money. Thangamayil is a well recognized and trusted brand for them.
For future growth TMJL keeps on training managers at existing locations. TMJL has also tied up for the fund and have identified locations at different town. So all the ingredients required for growth are present.
TMJL management is willing to share profit with its investors. Compared to other jewellery companies, their dividend is good even when they are growing at 50% and there is huge expansion plan ahead.
100% of their business is retail. No wholesale. (Margins are obviously better in retail.)
Cost of fund is on decline and will keep on declining with RBI will cut the rate sooner rather than later. That will be icing on the cake.
TMJL is also planning to start online sales in 3-4 months. That is non-fund activity as they don’t need to keep additional inventory. Only extra cost will be marketing, which is not much as it also creates awareness and gets footfall into stores.
Where do you get a company which is growing at 50% and is available at trailing p/e of 4 when even dividend is growing? TBZ is quoting at p/e of about 12. Why should TMJL not quote at par or above TBZ? TBZ declared dividend of 7.5% while TMJL declared 70%!! TMJL is due for re-rating once investors recognize this GEM. Difference between TBZ and TMJL is that former is the known brand in Mumbai and Gujarat where investor communities live, while TMJL is the known brand in Tamil Nadu not in Mumbai/Gujarat. So it is like a hidden gem.

Concerns-
·       High debt: Since the company is growing fast with internal accruals, they are using debt. But debt is mostly in liquid inventory - gold. I had mentioned to the management about the risk of the decline in gold prices. They are aware to that risk and are increasing gold loan portion to reduce that risk. Once that risk is covered, I am not concerned about the debt as it is totally liquid and their business is retail.
·       Opportunity: The opportunities are huge. IMO they need to increase brand awareness in cities like Coimbatore, Salem, and Tuticorin with help of more advertisement and involvement of outside agencies in marketing. This can increase sales and brand awareness substantially in newer cities.
There is an opportunity in creating other brand as they have infrastructure for the rest of the operation. For example Hindustan Lever has Lifebuoy for 'Tandurusti ki raksha' and they have Lux for "Saundarya". So they can add smaller stores in big cities with more push of diamond/platinum/gems etc.
In the future they can add loans against gold in the existing stores. This division will run on zero additional cost. As all the expenses for location, electricity, security, employees, marketing are already in place.

Overall I was extremely satisfied with my visit. TMJL will certainly get recognition with investor communities by their sheer performance. Floating stock is only 9% according to my calculation. My price target for next 2-3 years is 700. If market sentiment gets better, it can go even higher. The logic is quite simple. Company plans to grow 50% CAGR. Even at 40% CAGR the profit will double in two years. Even after two years there will be visibility for growth. So even at extremely conservative valuation company can easily get p/e of 8-9. You cannot go wrong with TMJL. So be right and sit tight.

Disclosure: Manish and I are invested in TMJL.