Screening for Hypergrowth Companies aka "Listed Startups"
2 Potential Unicorns in the listed world currently valued at around USD 150 Million each
Govind and I often delve into discussions about the justness of startup valuations, especially for those listed in public markets, weighed down by limited profitability, regulatory complexities, and persistent employee turnover. Yet, we both recognise that a majority of VC-funded companies or those with startup-like features usually experience rapid revenue growth.
This led us to an intriguing journey of identifying smaller companies that embody these startup-like characteristics. We discovered two promising businesses: a Specialty Paint Manufacturer and Staples FMCG Ltd in the rice sector. Both are early in their growth phase but have already piqued the interest of notable investors, highlighting their potential as emerging growth stocks.
A Closer Look at Two Emerging Companies :-
A. Specialty Paint Manufacturer: Blending Tradition with Innovation
This Specialty Paint Manufacturer, was founded 100+ years back, has a storied history. Since its acquisition by two major groups in 1989, it has grown into a manufacturer of both decorative and industrial paints. Its products have graced iconic Indian landmarks like the Howrah Bridge and Rashtrapati Bhawan.
Its product lineup is extensive, covering various surface needs with brands like Weather Pro and Super Shaktiman for exteriors and Signature and Stay Clean for interiors. The industrial paints segment is just as strong, with high-performance coatings for demanding applications in nuclear power plants, aircraft, and railway coaches.
The company operates four manufacturing plants, with a wide distribution network of over 3,000 dealers. Its international reach includes Nepal, the UAE, Bhutan, and Seychelles. Faced with intensifying competition, the company plans to up its marketing ante, increasing its visibility among emerging brands like JSW Paints and Grasim.
In product development, the focus is on expanding offerings in waterproofing and wood coatings. The goal is to match about 90% of what competitors offer, with improvements in product formulations and quality.
Financially, the company is focusing on substantial capital expenditure, funded through a mix of debt and internal resources. The aim is to modernize and automate facilities, thereby enhancing efficiency and meeting industry standards. Recently, they engaged in aggressive fundraising, including equity shares and debentures to a unicorn B2B Construction Marketplace.
The involvement of the unicorn B2B construction marketplace, holding approximately a 25% stake in the paint company, is particularly noteworthy. This investment isn't just financial; it's strategic. Such a development could redefine the company's ownership dynamics and strategy.
The partnership with the marketplace also opens doors to numerous synergies, particularly in distribution and sales channels. The paint company's products could soon find new avenues for promotion within a network already deeply integrated with construction and renovation needs.
The management team of this Specialty Paint Manufacturer are top-tier industry veterans who come with solid expertise to run the show. The CEO, known as a turnaround specialist, brings a unique ability to revitalize company performance. The finance expert, with his extensive experience in the chemical sector, and the Director of R&D, a veteran from a leading paint company, add depth to the team. The Director of Manufacturing and another key director with diverse industry experience round out a team well-equipped for strategic growth and operational excellence.
The growth strategy is ambitious, targeting an annual growth rate of 20%-25%, and improving gross margins to about 35%-36%. Efforts are ongoing to narrow the gap in gross and EBITDA margins compared to competitors through operational efficiencies, improved product mix, increased sales volumes, and economies of scale.
Additionally, the company is expanding its distribution network, especially in Tier 1 cities, and focusing on direct marketing to influence customer preferences. Employee motivation is supported through ESOPs and performance-linked incentives, aligning their efforts with the company's goals.
We would like to credit a young student Darshil Jain who first shared this idea with us.
B. Staples FMCG Ltd: Pioneering the Rice Industry
Staples FMCG Ltd is a key player in the rice industry, specializing in milling, processing, and marketing basmati rice. Their product range includes Zarda King Golden Sella and Biryani King, as well as Shakti Chakki Fresh Atta and regional biryani kits. The company's revenue in FY22 predominantly came from rice exports (80%), with domestic sales at 18%.
With a significant global presence, exporting to over 38 countries, Staples FMCG Ltd partners with major global retailers. Its manufacturing strength is supported by three milling plants and nine Sortex plants, with an annual production capacity of 440,800 metric tons.
The strategic move to establish a subsidiary for domestic market enhancement involves collaboration with numerous distributors and a significant presence across major states.
The company's financial performance, though variable, indicates strong domestic and international market presence. Key financial metrics point towards profitability and operational efficiency. Staples FMCG's business strategy includes a strong focus on B2B relationships in exports and a diversified portfolio in domestic sales.
Their expansion into Agrotech and emphasis on digital channels and modern trade align with current market trends, positioning the company for ongoing success in the rice industry.
Financially, the company has been active too. This move, coupled with a balanced approach to revenue generation from both exports and domestic sales, underlines their ambition to maintain a leadership position in the rice industry.
The recent stake sale in the subsidiary by the parent company to a leading consumer venture capital fund (our personal favorite) signal a pivotal shift in strategy. This investment by the venture capital fund, known for its focus on consumer sectors, indicates a strong belief in the subsidiary’s growth potential and brand evolution.
With a renewed focus on the Indian domestic market and an expanded product range, the subsidiary is poised for significant growth. The venture capital fund's involvement is expected to bring not just financial investment but also strategic and operational guidance, enhancing the subsidiary’s market presence and product innovation.
Conclusion:
Speciality paints company
Pros:
Solid legacy and heritage (yielding market credibility) with lots of product focus
Top tier management team for whom this line of business is second nature
Focus on diversification tapping into Blue Oceans
Prudent Capital Allocation by the team
Now has a strategic backer with fairly deep pockets
Cons:
At the end this is a distribution game rather than a product game, we still have to see if they can deliver an Asian Paints level SLA
Low Gross Margins, there is no price elasticity in this segment
Capital Intensive business - this requires significant CAPEX and R&D expense if one is looking to enter via creating new categories
Poor ROCEs till date because of the above
Competitive Market S&M spend will keep increasing
Staples FMCG Brand
Pros:
Robust international distribution: Product is sold in sub 2000 stores worldwide
ROAs and ROEs show a positive trendline
Solid supply side with ample capacity for expansion
Subsidiary (focusing on domestic market) has a top-tier backer with experience in building solid household name consumer brands in India.
P/E is relatively much lower as compared to peers
Promoters have solid skin in the game
Cons:
Demand seems to be slightly erratic as performance fluctuates every quarter
Positioning is a challenge considering category is a commodity and there is no inherent differentiation on the product side which could be leveraged to build the brand
Not much clarity if the domestic business has found channel market fit and how much money is the business making from them
Unsure whats the treatment with interest costs and business is fairly WC intensive
We want to emphasize that this communication should not be misconstrued as a recommendation, as we are not SEBI RIAs. It is crucial for readers to conduct their own due diligence and exercise caution. Therefore, we urge all readers to approach this opportunity with prudence and carefully consider the potential risks involved. While the prospects appear promising, it is essential to maintain a cautious approach and stay informed of the inherent dynamics of the industry.
Happy to chat and discuss this in detail
About Us -
Govind Shorewala - Entrepreneur (Mining, Textiles) & Investor (Private & Public Markets) → Reach out at: govind.shorewala@gmail.com
Aaroah Mittal - Early Stage VC → Reach out at: aaroah.m@people-group.com