Today I started with Tinplate Company of India Ltd. It is a Tata Enterprise and the "largest indigenous producer of tin coated and tin free steel sheets in India". The company has been in the business for over 90 years. Yet the market capitalization is only 358 crores.
It is a coincidence that today only I got a copy of the latest Capital Market magazine. The cover story is "small forever." The article covers the case-studies of Ultramarine & Pigments and Paper Products Ltd. Both the companies have been into their business for decades, and yet have failed to scale.
In case of Ultramarine, "though the company has reported profit over the last one decade; out of last 10 years, it reported decline in profit in five years." The reason associated is "over-dependence on few clients."
Paper Products has multiple big FMCG clients including Levers, Nestle, Cadbury, Coca Cola etc. Yet the company hasn't been able to scale as it "is sandwiched between big customers on one hand and is a commodity play on the other hand."
It is interesting to see that in both of the above cases, the companies were in a sort of commodity business and that their clients were big corporations. Thus the other party got to dictate the terms.
Coming back to Tinplate Company, tinplate is widely used in packaging industry. Infact 55% of the domestic demand is met through imports. But it is the other substitutes (tetra pack, pet, plastics as well as non-prime tin) that pose a major substitution threat due to their cost competitiveness. It is very similar to the above two cases of commodities and big customers. There is some hope for good growth in top-line but the growth in bottom-line looks doubtful. Valuations too don't look too cheap to provide a good margin of safety at these levels.
Yesterday I also talked about Astra Microwave while studying defense stocks. Well, I will need to delay it again for tomorrow.