welcome back and today is our last session on the series where we have discussed

how small and mid caps can be long term multi baggers and can create with and how
they can be even less risky sometimes then what the market perceives and creates
wealth for young investors as well as seasoned investors. So till now, we've
discussed various hunting grounds where we can spot the multi baggers that we were
discussing, and today in our last episode, we will be discussing another hunting
round, which is import substitution. If you look at the structure of our economy,
we've been marred by imports of a lot of finished and as well as well as
intermediate goods. And that is where a lot of our foreign exchange is guzzled.

If we have to become a stable economy, and the motive of this covered government
has also been to replace a lot of imports and to domestically manufacture them. If
you can find any product into this theme. You definitely can find the government
support via various schemes like the PLA wherein there are production linked
incentives. And these incentives have worked very well with other Asian economies.
And this experiment in India will also bear a lot of fruits in terms of saving a
lot of foreign exchange in India. Now this team started way back not just because
of our reasons, but for some reasons that were happening in China. China itself was
becoming in competitive in a lot of chemicals, and it was giving opportunity to
Indian players to make hay while the Chinese sun was going down. And that is well
we think that Indian enterpreneurs, which started as a small experiment has grown
to such a large focus by the government, the enterpreneurs and also the society.
This team overall is a win win situation for both the government and the
intrapreneurs. It saves the foreign exchange for the government creates employment
over here in India and also for enterpreneurs. It creates long term profitability
which can fund their large expansion projects and also help them create well. So
this team has a lot of points which attracted us way back in 2015 16. And one such
company which comes to our mind, which captured this team beautifully well, is a
company called Deep Orgonite right. Now, when we looked at the company, it was a
very risky venture, because what they had set to achieve was a daunting task. And
if someone would have at hand turn the table and said that this company which is
going to be a multi bagger and is going to create the kind of ecosystem of import
substitution that it has now, we think that it would have been an overstatement.
And doing that then was not at all possible. But we were very much excited by the
small window of opportunity. So this was the opportunity which was again brought by
one of our clients who was in the plywood industry. The client shared with us that
he was importing this material called finol for many, many years and almost the
whole of India was importing 80% of its requirement. And they had now a light at
the end of the tunnel. That a company from India was setting up a large facility
which could completely do away the inputs and provide a localized manufacturer for
this chemical. And that meant that the working capital cycle of these players could
improve significantly. They were concerned by the long working capital cycle that
was getting blocked because of their money getting stuck with the imports in the
containers and it took long for them to import into India. So when the puck was
putting its plant more than maybe Deepak nitride itself, the people were more
excited was the plywood guys or the lemonade guys, because they could see that a
big problem on this could be solved if the puck was able to crack this chemistry.
But when we looked at the financials and the kind of CapEx that Deepak was going to
do, it was looking to be a very risky venture. I mean for a company which had just
four to 500 crores of acid was going to do a CapEx of 1500 crores which was almost
3x its size and had to in an industry or in a product so it set up a subsidiary
called Deepa fanatics. And it didn't have any experience in the team on the
chemical earlier. But the promoters of the entity to the challenge and also had a
very aggressive capex target with having 60% of the funds as dead and 40% of the
funds to be infused, why equity or via internal accruals and those were the days
when chemical plants in India were not had profitable. So the profitability from
the chemical division of Deepak nitride which they were having the intermediate
chemicals itself was not that sufficient to fund the project. substantially. So
they had to take a substantial Kyp to fund the project and the rest of it was
covered by debt. And if someone could have just looked at the working of the plant,
and the profitability that they could achieve, it still looked that if the margins
were below 50%, it would become very, very difficult for them to survive, and the
plant in fact could ruin the existing business of Deepak nitride itself. So
bankruptcy was the biggest risk over here rather than anything else. But we were
very much concentrated on the shine in the eyes of the internet that we could see
that he

was so much excited that there was a player from India, who was challenging all
these global giants who are dumping the products in India. And they were actually
quoting a price which was detrimental to the interests of these enterpreneurs
Deepak nitrite when they announced this capacity, they were a company which was not
being recognized by either mutual funds or institutions and again, a company which
in the past, had shown that it was a leader in a lot of intermediate chemicals, but
still there was doubt because the capex amount was so large if someone would have
looked at the history of the promoters of Deepak nitride, they had entered in a lot
of other chemistries earlier and had a formidable 40 to 70% market share in the
divisions that they operated. Still, people doubted that this new chemistry would
be very tough to crack to the surprise of most of the investors, as we look today,
Deepak nitride in fact has been able to, but if you look at your overall cash flow
profile, or the sales growth or the profitability that this company has been able
to achieve, looks like a fairy tale and it's a complete miraculous turnaround that
this company could do in its fortune and his fortune for the investors. Now,
surprisingly enough, the sales of Deepak nitride and its profitability which was
hovering at around just maybe 100 Crows, and sales of just around 700 800 Crows
rose to a whooping five to 6000 rows of sales and profitability is now close to
1000 rows, or 10x kind of a profitability jump and the valuation in fact is only
going to start the next. Most of the times when we see the profitability go up. 10x
stocks go up 20 30x We're here Deepak nitride might have just won 15 to 20 eggs,
but that is the kind of profitability growth year and year it was able to achieve
in a chemistry which was tough to crack. But again, these people from Gujarat as I
discussed in my last video also have a grid which is beyond comparison, and they
have a long term mindset. And that is something which we will do that the
enterpreneurs are able to depict again and again. And these are examples across
various industries like pharma, chemicals, textiles, and even paper industry where
these people have in fact made a mark of themselves. So now if you look at the
overall industry, the size of the growth that they were targeting way back was
actually substituting the whole of imports of India. So when they started to think
about the plan, generally what we've seen in the past, when a chemical is imported
in India, people try to make a plant which can substitute 20 to 25% or maybe add
Max 40 50% of the overall imports that are happening. Deepak had the guts to stand
up and say that I will provide the 100% requirement of India completely, not 30%,
not 40%, but 100%. And that was a commitment that the promoters took, and that was
what they were able to achieve in the hindsight. Now putting up a large capex there
has a lot of risk. Involved in terms of the technology in terms of setting it up in
terms of this long gestation period, where the test production might not be up to
the standards or the approvals from clients might have taken long. But that was
where the UK was very steadfast. It's set up the capacity in record time, and setup
the approvals and was any product as early as 2018. While focusing on its
profitability departments also made sure that it was having its growth again in its
mind. So currently, the company which had taken a loan of almost 1000 to 1100
crores as almost gone on the way of becoming debt free. And now the promoters are
again having a plan of around 1000 crores of fresh capex to increase capacities
across the Nordics and other divisions. Where in 700 crores would again go to the
phenolics a downstream products, which will be again a market development because
they are the margins can be even higher. In fact, the phenolics division which we
had anticipated that even if it is able to achieve 20% profit will be a huge bonus.
The company has been posting offload around 40 to 45% of margins in the phenolics.
And with the speciality downstream products, which are now planning the margins can
improve even further. That is the kind of runway of growth this company has set
itself in on and the earnings have only multiplied the shares till now and just
imagine if the company in the coming years is able to achieve which is again has
set to I'm doing a CapEx of around 1000 Crows and I guess the promoters hunger for
growth would not stop them there. This company has an opportunity to put fresh
capital into various chemistries and grow the business at a healthy rate. And
improve the cash flows. And the best part is that the book can come without much of
this because the company is now almost debt free and the future expansions can
completely happen on internal accruals. Just imagine 1000 rows of cash each year is
the company was only making around 50 $60 a year. That means it could put out
almost one more Deepak nitrate in almost three years. That is the kind of growth
and the company's cash flows have seen. People sometimes get surprised that why 100
bagger is made or how 100 bagger is made. This is the pure recipe of 100 bagger 100
baggers are companies which have the potential of putting incremental cash flows
for multiple years in fact decades into their own business and grow it at a rate
which is higher than the growth rate of the economy and their own industry. Deepak
nitride has been growing much faster than the GDP of the country, but more
importantly has also been growing much faster in the chemical industry itself. And
if the promoters can achieve the same magic miracle that they were able to achieve
with a previous plan. It has all the ingredients for it to become 100

and that is what this time would be achieved by lesser number of variables that
they cannot manage or lesser amount of risk, because the balance sheet is now in a
position to try and test and do a lot of r&d. In fact, over the past three to four
years, the company has spent almost 100 crores in r&d have a lot of new chemistry.
That is what winners are generally made off. They don't sit and keep quiet once
they've achieved a milestone. They create new milestones go for it and again, start
a fresh like it's a new innings. And that is when we absolutely love management's
like Deepak Right, right. And if you look at this theme, and that is why we just
don't love a company called Deepak nitride in this theme. In fact, we love the
theme itself. import substitution would create a lot of billionaires in the coming
decade. Are you willing to ride in on one of them and understand their story and
the way that it can be beneficial to you is something that you need to just imagine
the kinds of products that can be made in India which we are currently importing.
One case in point can be toys, right? Just look at the size of the market. That it
is. And if there is a formidable toy manufacturer in India, there is a huge scope
of opportunity for it to grow by being one example that I've just stated that can
be n number of products which can be replaced by manufacturing them in India. You
can just go to the category of products that India is importing and that old data
is available freely to most of the people who can go and refer and you just look at
these categories and if category by category is disrupted and those are being made
in India, you will find a lot of winners which can come up and stand and deliver
your focus in this thing. And these are the opportunities that are only going to
last for 10 or 20 years, because by that time, we would have figured out what is
our strength and all the categories that could have been disrupted and imposed
where it could have been substituted in India would have been substituted. So if
you're thinking that I'll understand this team for maybe five, seven years and then
start I guess you'll be pretty late because this is the peak time where you should
be looking at these stories and over a period of decade. Lay them make money and
that is the way money is made. You also need to time your exits well and that is
where we are looking at a lot of various categories of imports, where we are seeing
a lot of Intrapreneurs who are doing a wonderful job in putting up capacities. And
the good part is that the government is also focusing on providing them the
technology gap schemes where PLA is reducing the cost of manufacturing. These
companies could scale up and have as high as a operating leverage or efficiency of
their foreign counterparts. Also, it

is very much important that capital markets support these kinds of companies.
Because if capital is not provided at the right time in the right place, these
companies can actually vanish and they will not be able to buy the new product
again because of the lack of funding or the banks not willing to lend to the
project. More investors which had a bad experience have been now want to exit the
sector. It is very much necessary for our capital market participants to provide
capital at a lower cost to these companies till they are able to expand or come to
a level of their foreign counterparts. And in that sense, we have been very lucky
because these companies have been able to easily raise money via VOIP and we are
also seeing a lot of smaller companies now coming to the IPO market and raising
1000s of crores of capital to grow their business and put up capacities and
reaching almost the efficiency of any large global player These are exciting times
and we will want you to also study these things and also maybe come back to us and
discuss you can always get in touch and we can always discuss ideas. When we feel
the opportunities large the runway is good and the climate for growth is very high.
So to conclude things, we had focused on four themes and four themes which are very
close to our heart. There can be things that you might discover, but these are the
themes that we have taken it in our stride and they have worked beautifully for us.
The first theme that we discussed was around ancillary industries, right, where we
took an example of how ancillary industries can grow sometimes much better at a
lower risk in the mean industry like the example of Jamna auto, where it was
growing much faster than Tata Motors or Ashok Leyland and in the CV space became a
formidable player. And had a market share of almost 75%. The second example of a
theme that we took was about stressful situations, where we took the example of
actually Glasgow and how it was one of the best mergers in the history of corporate
India. These themes come very few and far between but when they come you have to
have a large capital allocated. And the third thing that we discussed about about
high growth companies, sometimes these companies can be very risky because if they
don't have that growth element come through, they will just collapse. But as I was
discussing that if they are able to grow and sometimes surprised on the growth on
the upside, they became large capital multipliers. And that is where most of you
will one of the company that we picked up from the solar team became a multi
bagger, and also was a story of how a company can in fact after 10 years also start
the growth of fresh and become a high multiplier in just two to four years. The
last thing that we discussed was about how import substitution as a theme is a
hunting ground for a lot of companies which can become multi baggers in India, the
theme which we believe over the coming decades, would make a lot of Intrapreneurs
billionaires and also investors. Well, I had a pleasure discussing our themes with
you. And I hope you all enjoy these success stories in your own portfolios. And you
create multi baggers, which are even higher than what we discussed in these old
sessions. Thank you so much and all the best for your investment journey. To create
success stories and come back to us. We'd love to hear about your story.

You

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