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Sunday, September 16, 2012

Earlier this year..

Foraging in the food and processed food industry brought me to Vikas WSP earlier in 2010.  By my metrics, it was undervalued to begin with back then.  The company was netting about a billion and trading at around two times that.  I started buying at around 25, with fair value assessment of over 50.  By December 2011, it dropped to 9.36 and I kept buying averaging at 13.  By March 2012, it had moved to over 60 and it was time to close out the position.
The thesis was food to begin with - Vikas is into guar gum products - interestingly, the products are sold also to oil drillers.  The gum is used to ease drilling process and prevent fluid loss.  The market for product was good and kept getting better with more exploration activities.
The supply for the industry is almost limitless.  The company is based in Rajasthan which has abundant guar - you see trees with guar on the road-sides.  The manufacturing process was refined over the years.  There is an active futures/forwards market as well for both guar and gum.  The by products are also saleable.
The company was planning for organic guar production to reinvest the gains from the new business line.  The strategy is brilliant in the long-term - Vikas bought land which wasn't returning anything during the organic conversion process.  My thesis didn't hinge on it - but explained the low capital efficiency.  The land was the downside protection for my investment.  There were also some governance issues of the past that was mostly done away with.

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