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What makes us do such crazy comparisons, many of you might wonder. After all, what’s the point in comparing an IT company with a manufacturing one? Well, there’s always something more to a story than what meets your eye at the first glance.

Many a time it’s worth digging deeper.

That’s one of the best kept secrets of smart stock market investors.

If you don’t have time to read today’s story, you might want to watch a 3 minute video to get the gist of this post!

Here’s our take on the comparison…

Don’t look at Happiest Minds Technologies and Supreme Industries just as individual companies. Treat them as two groups.

Happiest Minds first…

Happiest Minds is one of the youngest Indian tech companies (founded in 2011). In a short span, the company has achieved scale and profitability both. It managed to garner a profit of Rs 180 crore in FY22.

‘Born Digital. Born Agile.’ is its brand slogan.

Not so surprisingly then, Happiest Minds derives 97% of its revenue from digital technologies and 93% of its revenue is classified as ‘agile’.

In other words, Happiest Minds helps its clients employ some of the world’s best technologies and build competence to respond quickly to the market dynamics and workplace trends.

The global megatrend of cloud adoption might give you a hint of the scale and magnitude of opportunities available to digital and agile tech companies such as Happiest Minds.

At present, only about 30% of the global workload is on cloud. The migration is an on-going-multi-year process and the coronavirus pandemic has accelerated the adoption significantly.

And now about Supreme Industries

Supreme Industries is one of the oldest plastic manufacturers in India. Since its inception in 1942, the company has managed to keep up with changing times and take on competition fiercely. You will be surprised to know that the same management has been at the helm for more than 5 decades now.

Stories of companies (such as Supreme Industries) that manufacture dull and boring products sound repetitive beyond a point. And thus they rarely appeal to the intellect of young, ambitious and talented investors.

So our two well-defined groups are:

Group 1: Young, digital and agile companies that are scaling up quickly

Group 2: Old companies doing the same business for generations but still dominating the show

Now which group appeals to you the most, especially at this juncture?

Tech is the future and that’s a no-brainer but we can’t do away with dull and boring products either. We use a lot of them in our everyday life. Hence, you might be better off having companies representing both these groups in your portfolio.

This brings us to the most crucial topic of this conversation.

Whether you are buying a mature company or a new-age company for your portfolio, your success as an investor depends on your entry price. Buying cheap is the key.

But what if you end up investing in a company that doesn’t have competitive advantages or belongs to a sector depicting saturation? And what if the economic growth has come under pressure?

Inside out or outside in; what’s your style?

As we told you in one of our previous posts on stock investing, you can generate above average returns only by outsmarting or out-researching other investors. Please look at the above illustration. Every outer layer makes it more complicated for individual investors to outsmart or out-research other investors, especially the institutional investors.

For instance, do you think you can understand trends in GDP and employment etc. better than seasoned institutional investors would? Even experts get these trends wrong many a time. But it is relatively easy to decode how an individual company operates, isn’t it?

This boils down to a 5 point action plan:

  1. Don’t look at macro-economic trends in isolation
  2. Identify how big the sector opportunity is
  3. Find out companies that have high competitive advantages
  4. Never ignore valuations
  5. And mind your entry price

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Our blogs don’t offer any investment advice, but rather, they are meant for investors who want to read about stock market trends.  We also cover sectoral and thematic stories, besides sharing crucial company-specific observations. Moreover, our occasional blogs on mutual funds and other topics related to personal finance may help you take well-informed decisions.

 

Since our discussion began with Happiest Minds and Supreme Industries let’s test them on the aforesaid parameters. We may begin in the reverse order, since the valuations and entry price are the core considerations.

Price trends

Happiest Minds and Supreme Industries have declined 47% and 32% respectively from their 18 month highs. However, Happiest Mind is still up 148% on an absolute basis from its January 2021 levels whereas Supreme Industries is back to square one.

Valuations

On FY22 earnings, Supreme Industries is trading at a Price-to-Earnings (P/E) multiple of 22. Happiest Minds trades at a P/E of 67 on FY 22 earnings. Comparing these two multiples would be really an odd comparison and we should avoid it. Instead we should look at where they stand on historical valuations and how the respective sectors are valued?

Happiest Minds got listed in September 2020 therefore it doesn’t have a long enough history to benchmark its current multiples. But in general, valuations of tech companies soared over the last two years and zoomed past their long-period averages. Even after the recent corrections, valuations aren’t cheap although they have moderated.

Supreme Industries on the other hand trades at a discount to its long period averages.

Company-specific competitive advantages

Happiest Minds is targeting a 20% compounded annualized growth over the next 5 years. The company has similar ambitions of meeting ESG (Environmental, Social and Governance) targets. It wants to become carbon neutral by 2030. Happiest Minds is open to considering acquisition opportunities to achieve faster growth.

And going purely by its stock price performance since listing, it appears that investors have high hopes from Happiest Minds.

Supreme Industries on the other hand has an extensive product portfolio catering to four segments—Plastic Pipes & Systems, Consumer Products, Industrial Plastics and Packaging, amongst others.

Plastic pipes score well on five important parameters—utility, weight, cost, installation, and maintenance. Plastic piping systems and fittings find extensive applications in irrigation, potable water supply, sewage & drainage and plumbing & sanitation.

Supreme Industries enjoys a 15% market share in the organized domestic market for plastic pipes and systems, which drives 65% of the overall market.  The remaining 35% market share is with unorganized players.

Supreme Industries too remains optimistic about its future business prospects and has lined up a capex plan of Rs 700 crore. It is targeted at building new capacities, expanding and modernizing the existing ones and adding new products.

Supreme Industries is working on doubling the share of renewable energy in its total energy consumption basket from 12.4% at present to 25% by FY25. This might help the company improve its position on ESG compliance.

Supreme Industries has production facilities at 25 locations in India which saves it freight costs, offers faster market access and other competitive advantages.

Sector specific opportunities

Agile tech companies such as Happiest Minds depict India’s services export capabilities. Investing in new-age agile IT companies having high export revenues gives you exposure to the global tech theme.

On the other hand, old companies manufacturing dull and boring products predominantly for Indian markets are in a sweet spot as long as they remain quality cautious and cost-competitive. India’s journey to becoming a 5-trillion economy would look difficult unless the contribution of manufacturing sector goes up considerably.

And finally, the economic performance

At present, the global economy is feeling the heat of inflation and rising interest rates. Many experts now fear that the US economy is likely to face recessionary pressures. Global economic performance matters more to export-driven IT companies. The US and Europe are the biggest markets for most of Indian tech companies.

Domestic consumption trends primarily drive the performance of companies such as Supreme Industries which appear fairly strong.

By the way did you notice?

There are two more underlying themes playing out:

  1. Exports vs domestic consumption
  2. Manufacturing vs services

These themes are multi-year growth opportunities. You can participate in more themes with the same companies.

And here’s how smart investors use apple-to-orange comparisons to their benefit

Smart investors never feel constrained by any categorization. If they sense a scope for improvement in earnings and find that valuations are moderate, they search for buying opportunities and vice a-versa.

Now how can you spot stock triggers?

It is a million dollar question. But to give you some idea, let’s look at what might surprise Supreme Industries earnings. PVC Resin is one of the key raw materials for Supreme Industries. It has seen a sharp spike over the last two years. If the prices stabilize and the company manages to execute its capex plans as per its schedule, it might get tailwinds of additional capacities in the years to come.

Since PVC is a crude derivative, any fall in crude oil prices and crude derivatives might be an interesting factor to watch out for.

Similarly, if the US and EU shun recessionary pressures and manage to clock higher than anticipated growth over the next few quarters, tech spends may continue uninterruptedly. In that case, fast-growing tech companies such as Happiest Minds might swing back into action.

The moot question is what looks more probable? Do let us know what you think.

You may also like to read: Time to cherry-pick companies that use metals as their raw materials?

Disclaimer:

The blog is for information purposes only and anything mentioned herein shouldn’t be construed as a fundamental reason to buy/hold/sell any stock. Furthermore, the information provided in the blog and observations made therefrom shouldn’t be treated as the extension of recommendations made on the other properties of Ventura Securities. If you follow any research recommendations made by our fundamental or technical experts, you should also read associated risk factors and disclaimers.

We strongly suggest you to consult your financial advisor before taking any decision pertaining to your finances. Asset allocation becomes extremely relevant.

We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:

 

We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company.

We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.

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