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Note: The artciles are not research reports but assimilation of information available on public domain and it should not be treated as a research report.

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Disclosure: It is safe to assume that I might have the dkiscussed companies in my portfolio and hence my point of view can be biased.Readers should consult registered consultants before making any investments
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Wednesday, September 28, 2016

The turnaround Capital goods bet with Multibagger potential

The company was suggested to the premium members few weeks ago. It has moved a good 30% since then. Still looks a company with multibagger potential. People interested for our coming Mumbai workshop as well premium small cap services pls fill the below form. For assistance do whatsapp/contact Ujjal at 9831291631 or dip at 9007652301.

AGM Updates:-

Improvement in operational efficiency by reduction of manpower and raw material cost (thereby improving ebidta margin). Being 70 yr old co., the cos main strength is offering diverse product range & designing and customising products according to the clients requirements. Supplying products & services to almost all the Fortune 500 companies.

Improving topline and market share in Railways & Defence segment, incurring R&D expenses to develop and introduce new technology driven products and thereby improve application of product line in steel, sugar, textile, cement, energy etc. Trying to get back in defence business where we were 15 yrs ago. Looking forward for better results in Q3 and Q4 due to good order inflow for (Mysore plant for oil fill transformers) and growth seen in the abovementioned sectors. Getting orders (revenue) is not a problem for the co, main aim is to reduce the working capital debt and interest burden cost & improve distributor network. Certain defence orders are in L1 stage(lowest bidder in tenders).

Expect huge market for renewable energy in India. Cos top mgt executives have been touring and meeting power station companies.

The co will bid for a Water Grid project (Irrigation scheme - provide drinking water from various rivers near AP to all its various cities) and expecting to get an order worth 50 Cr in Telengana state for supplying 1000+200 high and low voltage Pump Set (of 12 Lac each). Execution will come in Q3 & Q4. Recently, the co has got solar project order worth 60 Cr. It is the biggest opportunity for revenue growth.

Restructuring undertaken with banks in 2014 for working capital and improving cost of capital. The co has been gradually reducing the Deposits (of 24 Cr) and ICD (of 22 Cr).

Make company debt free over a period of time by disposing non core real estate assets of the co. in Hubli of 100 acre near hubli airport, initially earmarked 20 Cr, which will fetch them 120cr (waiting for approval from the state govt to ride over the crisis), Mysore - 5 sites worth approx 50 Cr, Regional Office spaces in Delhi, Hyd, Pune, Bglr etc. (probable model to be adopted by the co. is disposing of and taken back on rental basis). Reducing debt with corporation bank.

Total real estate non-core assets of the company is more than 1000 Cr.

My view: Recent step taken by the mgt regarding sale of treasury stock worth 18 Cr and QIP issue of 37 Cr was one of the brave and bold step. It has brought positivity and optimism among all the employees of the company and they will work really hard to bring it back to the top. Initial issue of working capital is solved and they have started concentrating on the business.



Scuttlebutt from the biggest distributor who is with the company for last 20 years:-

If you order LVM motors today u will get it tomorrow. So there is no problem of dispatch in standard motors but if you demand for specialized one then depending upon size, features delivery time gets from 1 month to 6 months.Recent speech from Chairman was fantastic. Expecting very good profit in next 2 years Crompton and abb are also aggressive.This company has huge land bank in banglore and hubli.

•Ravi series is doing good because of terminal arrangement on top & side both available. Earlier only side terminal arrangement was available but now both.70 to 80% more efficiency achieved in ravi series, complaint have came down drastically.In terms of sales & network, the company is like maruti & lupin.They have purchased new land 5 to 6 years back.It is Trying to increase market share.It is trying to hire big guys from market.

2 to 3 wrong people have chaired in the company due to which last 5 to 7 years were not good. New MD had come recently and is cleaning all dust from the company. He removed all wrong people, all inventory were cleaned. Also fired people who were thinking company like government organization.New MD is silent and aggressive. I have personally felt that he is working very hard.In my 15 to 20 years of experience at the company I can definitely say that things are improving sharply and next 2 to 3 years will be fantastic.I am very optimistic.

Trying for new supplier with new people.New MD is pure finance guy and cleaning all inventory.I have personally seen all plants of it and felt that, recently accountability & responsibility has improved for each and every person. Getting quarries from lost customer which is big achievement as of now.In terms of brand, Crompton, this company, abb is preferred (Order).


Summary:-

What happens when a family managed company with good products and a great brand recall changes its PSU approach to be a well managed private one? That's precisely the story of this company.They have given two professional rockstars a free hand to run the show. VB,who was the CFO of the company got promoted to be the MD around 2015. AH,the star salesman with wealth of experience in the industry took the charge of being the sales head. They are churning inside out to transform the company and take it to the coveted league.

The problem of the company started with the acquisition of LDW in 2008,a German company known for its technology. The recession followed which made the matter worse for the company. Inspite of every possible support from the Indian parent the German subsidiary couldn't turnaround. Few quarters back it finally gave up and booked the losses. They have imbibed the German technology and with the sector it caters to looking up,better days finally prevails for the company.

The company posses rich non core assets to the tune of over 1000crs(mostly land parcels and factories which are not needed). They are in active dialogue to dispose of the same worth 400crs and make the high debt entity a debt free one. Over the course of next 2-3 years,Company would be a lean entity with no more interest cost obligations. Would be prudent to note that the present interest cost of the company would be near 40crs.

The end users of its products aka the sugar,power,steel and cement industries have started seeing times changing for good. If your output user marks a rich turnaround,the vendor too will turnaround right? Often common sense is very uncommon,notably in case of retailers in terms of selecting listed entities.

Our channel checks from its dealers network across the country vindicates the point on the demand front. Customers are having a waiting period of 2-3 weeks for its Ac-Dc motors. Dealers also suggests about the renewed focus from the company's end. It has a near monopoly status in "Oil Filled Transformers" where it's seeing huge demand. Last year they did around 18cr sales. This year they already have orders worth 90crs in hand,comes with double digit EBITDA margins.

The company always had orders but owing to working capital crunch they couldn't execute most of it. The condition went so precarious that it had to resort to selling its treasury shares in and around December 2015. It garnered 20crs and finally scripted a turnaround after a very long time. They did a QIP of 36crs recently at 46rs which would further provide relief and help it to achieve the 700crs targeted topline figure.

What's a blessing in a disguise? How about accumulated losses of hundreds of crores in its book which means no tax obligation till it surpasses the accumulated losses within the tax window of 7 years. Management did clarify about no MAT either.

Conclusion: After exactly 8 quarters or in the December 2015 numbers,company finally came in green. Last 2 quarters been profitable too for the company. It targets a 30% growth where its sales are expected to surpass 700crs this fiscal. Estimated EBITDA of 9% gives us a PAT figure of around 15crs(63crs minus interest cost of 36crs and depreciation of 12crs and with no tax obligation). Company quotes at 23 times fy16-17 earnings. Fy17-18 will see it clocking 880-900crs of sales with higher margin orders. EBITDA expected of around 11% makes the company quote at just 7 times. Turnaround bets are greeted with higher valuation and with the company catering to core sectors,it would always quote in a range band of 15-20. Peers group which are notably the behemoths,your Alstom,Siemens and Abb of the world are quoting at over 30 times fy18 earnings. Also as mentioned earlier in the reports they are targeting to be a debt free entity over the next 3 years. In case that happens,Company could well pen a scripture for itself with shareholders making multi fold over the next couple of years. A delight of a bet in a quintessence meant for your core portfolio. Now don't bother asking the target folks.

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