Revenue of a company can further be analysed on Product/ Service Level through two angles. Please read our blog 107 - Analysing Revenue sources part 1 to understand remaining angles of analysing revenues of a company on product/service levels.
a) Commodity Vs Specialised product Revenue
Often businesses engage into both commodity product manufacturing (can be easily replicated by others hence low margin products) as well as Specialised or Value added product manufacturing (very difficult to replicate due to confidential/ proprietary processes hence high margin products).
If an analyst would want to judge how these products manufacturing has been driving overall margins of the business, one will have to look into what % Revenues are being driven by these products individually.
Unfortunately, data for such disclosures are not always available straight-forward in the footnotes. To do this, one may need to visit other sources such as Concalls, Investor Presentations, Management Interviews, etc. Below we have explained one such example of Garware Technofibres.
Case Study: Garware Technical Fibers
Garware Technical Fibres is a leading Indian as well as a global player in the field of synthetic cordage and fibres. 2011-12 was a turning point in Garware’s history as it saw a leadership change with third generation taking charge; Vayu Garware became the managing director taking charge of the company from his father Ramesh Garware. Later Shujaul Rehman was appointed as president and chief operating officer; he brought 23 years of experience with him in various blue-chip companies. The company then adopted a strategy which involved entering new segments like protected farming, defense and launching new and innovative (Value added) products in existing segments. Coming up with innovative products has been the cornerstone of Garware’s success in recent years. The cost of failure of nets is high, Garware’s innovative value-added products (though priced higher) can in fact help bring down the overall cost of operations for the user and hence customers are more than willing to pay a premium price for the same.
However, the company does not share the data of the proportion of revenue from Value-added products annually. This is an obstacle in segregating margins of Commoditized Products and Value-added Products. But the CEO has a regular appearance in the media and has shared the revenue from Value-added products. “Three-four years ago, value-added, innovative products were only 30% of our sales and it has gone up to 70%.” (Source) We also verified the same from the ICRA’s Credit ratings report, where they too mentioned this valuable insight (Source)
Thus, applying the same, we get:
One can clearly figure out, the increased margins for the business has been due to an increase in product mix of Value added products which fetch really good margins for the business. Below comments from the Annual report also confirm our understanding.
Source: Garware technical fibres AR-21
b) Revenue on Key product/ Anchor product basis:
Case Study: Vinati Organics
Vinati Organics generates the majority of revenue from 3 chemicals named “IBB”, “ATBS” and “NaATBS” and has captured 65% market share in IBB and ATBS. At times analysts may be specifically looking for this kind of Top product/ Anchor products data. This may not always be available in footnote, but sometimes, may be disclosed as graphical content in annual report/ Investor presentation/ concall discussions.
Source: Vinati Organics 2019 AR
Note: While tracking, an analyst should not just focus on current anchor products, but also keep in mind a holistic perspective regarding the firm's view of future expansion which may not always happen in the anchor products space. Ex: ITC with their aggressive expansion in the FMCG space rather than Tobacco (current major revenue generator).
Now that we have seen Product/ service level Revenue analysis, Let's take a look at Entity level sources of Revenue analysis in Blog 109 - Analysing Sources of Revenue part 3.