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Fluidomat – Revisited
Coupled with Returns
7-Apr-2012
Contents
Background
Conclusion
Risks
Valuations
Financials
Management
Industry
2
Contents
Background
Conclusion
Risks
Valuations
Financials
Management
Industry
3
Fluidomat is a leading name in the fluid couplings industry with over 4 decades of experience
Business: Fluidomat Limited (“Fluidomat”, “Company”, BSE Code: 522017) is an ISO 9001:2008 certified company that manufactures a wide range of Fluid Couplings
Founded: 1971
Headquarters: Dewas, Madhya Pradesh
Products: Fluid Couplings are used in variety of applications including conveyors, fans, pumps, crushers, grinders, pulverizers, ball mills, wire stranding, paper machinery, cement machinery, digesters, churners, mixers, beaters, centrifuges, oil extraction machines and mining machines. A detailed list of their products is available here
Key end use industries: Steel, Power, Cement, Paper, Chemical, Fertilizer, and Ports
Employees: The Company has about 170 employees who have worked for several years with the Company
Manufacturing facilities: The Company’s factory at Dewas near Indore is equipped with sophisticated manufacturing, R&D, quality control and testing facilities to ensure quality and consistency required for producing intricate Fluid Couplings. The facility has an installed capacity of 1500 fluid coupling units
Website: www.fluidomat.com
4
Sources: Company annual reports and website
Contents
Background
Conclusion
Risks
Valuations
Financials
Management
Industry
5
The Company has strong relationships across diverse sectors reducing exposure to recession and negative black swan events
6 Sources: Company annual reports and website
Plant and Machinery : BHEL, Elcon, Mcnally Bharat, BGR Energy, Indure, Sayaji Iron & Engg, TRF, Thyssenkrupp Industry, ISGEC, L&T, Tecpro, AE Automation, Tecgates, HOWE
Power Plants: BALCO, Bhushan Power & Steel, MSEB, NTPC, PSEB, HPGCL, GIPCL, TNEB
Cement: ACC, Manikgarh, Binani, Jaypee, JK, Kuwait Cement, Ultratech, Shree Cement, Sanghi Industry
Coal Mining: Eastern, Mahanadi, Northern, South Eastern and Western Coalfields Fertilizers and Chemical Plants: Fertiliser and Chemical Travancore, GHCL, Grasim,
GSFC, IFFCO, Nirma, Paradeep Phosphates, Goodlas Nerolac, Heubach Colours, Indogulf Fertilizers
Paper and Pulp: Phoneix Paper and Pulp, Orient Paper, Tamil Nadu News Print and Paper, Hind Paper, Century Paper and Pulp
Steel: Bhushan Power and Steel, Essar Steel, SAIL, Neelanchal Ispat, Jindal Steel and Power, PT Ispat Indo
Metals: BALCO, Hindustan Zinc, NALCO Port Trusts: Mormugao Port Trust, Paradeep Port Trust, Adani Port Trust,
Vishakapatnam Port Trust, Madras Port Trust
Contents
Background
Conclusion
Risks
Valuations
Financials
Management
Industry
7
Fluidomat was founded by Ashok Jain and is currently managed by the Jain family
The Management of the Company is led by Ashok Jain, Chairman and MD, who is an
electrical engineer by education
Ashok Jain founded the firm in 1971 and has been associated with pioneering the
technology development in the field of Fluid Couplings
K C Jain, Chief Executive
A K Sinha, Director
Kunal Jain, Executive Director
Pramod Jain, Deputy Vice President and Compliance Officer
8
Sources: Company annual reports and website, BSE
The consistent increase in promoter shareholding indicates their confidence in the Company and is a positive sign for the shareholders
Shareholder Dec-2010 Mar-2011 Jun-2011 Sep-2011 Dec-2011
Promoters 46.69% 47.20% 48.04% 48.75% 49.45%
Public 53.31% 52.80% 51.96% 51.25% 50.55%
9
0
5
10
15
20
25
0
50,000
1,00,000
1,50,000
2,00,000
2,50,000
% s
har
eho
ldin
g p
ost
pu
rch
ase
Shar
es p
urc
has
ed
Shares purchased % Shareholding post purchase
Insider buying (Kunal Jain; Apr-2009 to Jul-2010)
Sources: BSE
Contents
Background
Conclusion
Risks
Valuations
Financials
Management
Industry
10
In the past five years, Fluidomat has grown profits at a CAGR of 23% led by growth in sales at 18% CAGR and margin expansion by 1.6%
11
12.0 14.3
16.0 18.6
22.9
1.0 1.2 1.4 1.9 2.3
8.5% 8.3% 8.8%
10.3% 10.1%
0%
2%
4%
6%
8%
10%
12%
0
5
10
15
20
25
FY2007 FY2008 FY2009 FY2010 FY2011
PAT
Mar
gin
(%
)
Rev
en
ue
s, P
AT
(IN
R c
rore
s)
Revenues PAT PAT %
Fluidomat – Revenues, Profits and Profit Margins (FY2007 to FY2011)
17.6% 22.7% CAGR (FY07-11) Sources: BSE
A reduction in SG&A, Interest and Depreciation expenses as % of Revenues, along with Revenue growth created value despite increase in other Manufacturing expenses
12
Fluidomat – Summary P&L (FY2007 to FY2011)
Sources: BSE
FY2007 FY2008 FY2009 FY2010 FY2011 Revenue 12.0 14.3 16.0 18.6 22.9
growth % 19.2% 12.1% 16.4% 22.9%
Expenditure
Manufacturing 6.7 7.9 9.1 10.7 13.7
margin % 55.8% 55.6% 56.7% 57.6% 59.7%
Employee Cost 1.7 2.1 2.6 3.2 4.0
margin % 14.5% 14.9% 16.3% 17.2% 17.3%
Selling & Admin 1.4 1.6 1.5 1.2 1.2
margin % 11.3% 11.4% 9.1% 6.2% 5.2%
Misc 0.1 0.1 0.1 0.1 0.1
margin % 0.4% 0.4% 0.4% 0.3% 0.5%
EBITDA 2.2 2.5 2.8 3.5 4.0
margin % 18.1% 17.7% 17.6% 18.6% 17.3%
Interest 0.5 0.3 0.3 0.2 0.2
margin % 4.0% 2.4% 1.9% 1.0% 0.7%
PBDT 1.7 2.2 2.5 3.3 3.8
D&A 0.3 0.3 0.3 0.3 0.4
margin % 2.6% 2.2% 1.9% 1.8% 1.6%
PBT 1.4 1.9 2.2 2.9 3.4
Tax 0.4 0.7 0.8 1.0 1.1
Tax rate % 25.5% 36.7% 36.7% 34.7% 32.8%
PAT 1.0 1.2 1.4 1.9 2.3
PAT margin % 8.5% 8.3% 8.8% 10.3% 10.1%
Average sales price for fluid couplings has gone up by ~40% in the past couple of years; volume sold was ~125% installed capacity in FY09/11
13 Sources: BSE
1,305 1,490
1,760 1,469
1,764
9.3 10.5 12.2 15.0 17.3
72 70 69
102 98
0
20
40
60
80
100
120
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
FY2007 FY2008 FY2009 FY2010 FY2011
Ave
rage
Sal
es
Pri
ce
(IN
R ‘0
00
)
Vo
lum
e a
nd
Val
ue
of
Fl
uid
Co
up
lings
So
ld
Volume Value (INR crores) Average Sales Price (INR '000)
Fluidomat – Units of Fluid Couplings Sold (FY2007 to FY2011)
While the consumption of Aluminum increased by 33% in the past 5 years, the average cost price has decreased (~20% till FY2010; ~7% till FY2011)
14 Sources: BSE
80 92 94 99
107
10.7 11.1 11.2 10.7 13.3
133
121 119
107
124
0
20
40
60
80
100
120
140
0
20
40
60
80
100
120
FY2007 FY2008 FY2009 FY2010 FY2011
Ave
rage
Co
st P
rice
(
INR
‘00
0)
Alu
min
um
Co
nsu
me
d
(Vo
lum
e a
nd
Val
ue
)
Volume (Million Grams) Cost (INR million) Average Cost Price (INR/KG)
Fluidomat – Raw Material Consumed (FY2007 to FY2011)
Raw material costs have more than doubled in five years, led by costs of Boughout Components; Aluminum costs’ contribute ~15% vs. ~25% earlier; ~98% raw material is local
15 Note: Raw material costs include Aluminum, other and boughtout components; further, raw material is either imported or sourced locally Sources: BSE
4.1 4.9
6.1
7.3
9.0 2.5%
2.3%
0.5% 0.3%
2.3%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
0
2
4
6
8
10
FY2007 FY2008 FY2009 FY2010 FY2011 imp
ort
ed
mat
eri
al c
on
sum
ed
as
%
of
Raw
Mat
eri
al C
ost
s
Raw
Mat
eri
al C
ost
s (I
NR
cro
res)
Raw Material Costs (INR crores) Value of imported material consumed as % of raw material costs
Fluidomat – Raw Material Costs* (FY2007 to FY2011)
25.8% 22.8% 18.5% 14.5% 14.8%
36.2% 40.7% 44.2% 37.1% 38.3%
38.0% 36.5% 37.3% 48.4% 46.9%
0%
20%
40%
60%
80%
100%
FY2007 FY2008 FY2009 FY2010 FY2011Raw
Mat
eri
al C
ost
s C
om
po
ne
nts
Aluminum Other Boughout Components
In the past five quarters, Fluidomat’s profits have grown led by margin expansion (~14%*) and sales growth (38%*)
16
4.2
6.8
5.4
6.9 5.8
0.5 0.7 0.6 0.9 0.8
11.5%
9.7%
11.9% 12.3%
13.9%
0%
2%
4%
6%
8%
10%
12%
14%
16%
0
1
2
3
4
5
6
7
8
Q3FY2011 Q4FY2011 Q1FY2012 Q2FY2012 Q3FY2012
PAT
Mar
gin
(%
)
Rev
en
ue
s, P
AT
(IN
R c
rore
s)
Revenues PAT PAT %
Fluidomat – Revenues, Profits and Profit Margins (Q3FY2011 to Q3FY2012)
Note: 14% is the PAT margin for Q3FY2012 which is significantly higher than the PAT margin for the past five years; sales growth is y-o-y growth for Q3FY2012 Sources: BSE
Fluidomat has almost become debt free led by efficient capital allocation as indicated by high ROCE and ROE
17
21
28
31 33
35
20 23 23
25 24
92%
49%
28%
18%
7% 0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0
5
10
15
20
25
30
35
40
FY2007 FY2008 FY2009 FY2010 FY2011
De
bt
to E
qu
ity
RO
CE,
RO
E (%
)
ROCE ROE D/E
Fluidomat – ROCE, ROE and D/E (FY2007 to FY2011)
Sources: Company annual reports and website
Fludiomat has continued to generate positive free cash flows and has significantly improved its cash position
18
1.7 1.6 1.7 2.1 2.0
-0.2 -0.3
-1.0
-0.2 -0.6
-1.3 -1.4
-0.4 -0.5
-1.6
0.2 0.3
0.5
1.9
1.8
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
FY2007 FY2008 FY2009 FY2010 FY2011
Cas
h a
nd
Eq
uiv
ale
nts
(IN
R c
rore
s)
Cas
h F
low
s (I
NR
Cro
res)
Operating Cash Flows Investing Cash Flows
Financing Cash Flows Cash and Equivalents at Year End
Fluidomat – Cashflows (FY2007 to FY2011)
Sources: Company annual reports and website
Contents
Background
Conclusion
Risks
Valuations
Financials
Management
Industry
19
Fluidomat is a debt free company trading at ~5x P/E and 4% dividend yield indicating a potentially attractive investment opportunity
CMP: 25, Shares O/S: 49,27,000
Market Cap: INR 12.3 crores
Debt: ~0
Cash and Equivalents: INR 1.8 crores
Enterprise Value: INR 10.5 crores
Book Value: INR 20.9
P/E: 5.3
P/B: 1.2
MCAP to Sales: 0.6
Dividend Yield: 4.0%
Average Daily Traded Volume: 2,280
52w Hi: 53.7 (5-Nov-2010)
52w Lo: 22.0 (24-Feb-2011)
20
Sources: BSE, Company annual reports
We published a research report on Fluidomat for the first time in Aug-2011, and subsequently in Sep-2011 with minor changes. Since then, the stock has gone up ~40%. For latest data, please refer to the next page
The investment opportunity in Fluidomat at 20s was a classic example of special situations
21
Sources: BSE, Company annual reports
0
5
10
15
20
25
30
35
40
45
50
55
Aug-2002 Aug-2003 Aug-2004 Aug-2005 Aug-2006 Aug-2007 Aug-2008 Aug-2009 Aug-2010 Aug-2011
Fluidomat – Share Price Movement (Aug 2002 – Apr 2012)
We published a research report on Fluidomat for the first time in Aug-2011, and subsequently in Sep-2011 with minor changes. Since then, the stock has gone up ~40%. For latest data, please refer to the next page
Fluidomat is a debt free company trading at ~6x P/E and 3% dividend yield indicating a potentially attractive investment opportunity
CMP: 34.9, Shares O/S: 49,27,000
Market Cap: INR 17.2 crores
Debt: ~0
Cash and Equivalents: INR 1.8 crores
Enterprise Value: INR 15.4 crores
Book Value: INR 20.9
P/E: 5.8
P/B: 1.7
MCAP to LTM Sales: 0.7
Dividend Yield: 2.9%
Average Daily Traded Volume: 2,873 (6-Apr-2011 to 4-Apr-2012)
Average Daily Traded Value: INR 84,327
52w Hi: 41 (16-Mar-2012)
52w Lo: 23.5 (2-Aug-2011)
22
Note: Share price and other data per the latest data available as of 7-Apr-2012 Sources: BSE, Company annual reports
Contents
Background
Conclusion
Risks
Valuations
Financials
Management
Industry
23
However, there are some risks and uncertainties associated with an investment in Fluidomat
Uncertainty in demand for Fluid Couplings: Fluidomat’s products are used in a variety of sectors; as such, its performance is not dependent on any particular sector. However, it is important their clients continue to grow and there is a demand for fluid couplings, a major source of revenue for the Company. Any fluctuations in number and price of fluid couplings would impact sales/profits
Fluctuation in raw material costs (Aluminum, boughtout components, others)
Fluidomat is a microcap, and as such, bears the investment risks associated with a microcap (illiquid, limited public information, etc.)
Location risks (including labor strikes, regulatory changes, transportation problems, etc.), given their manufacturing operations are focused in Madhya Pradesh
Any other negative black swan events
24
Contents
Background
Conclusion
Risks
Valuations
Financials
Management
Industry
25
Fluidomat appears attractive for a long term investment with low risk
Sector Leader: Fluidomat is a leader in Fluid Couplings; it is not surprising that Fluidomat appears second only to Wikipedia on a Google search for Fluid Couplings
Large and Diverse Clients: The Company has strong relationships with almost all the key players in diverse sectors. As such, it is fairly protected for general economic and client risks
Strong Financials: Growing fairly well in terms of topline and margins. Almost debt free with RoE/RoCE upwards of 20% on a consistent basis
Attractive Valuations: The stock is cheap at less than 6x P/E Insider Buying: The promoters have increased their stake in the Company to
49.45%. Recently, the shares pledged by the Promoters to IFCI were revoked, a breather to those concerned
Dividends Coming: The Company’s Board recently recommended a dividend of 1 Rs / share (3% yield at CMP), which is mouth-watering, considering this is the first time in the long history of the Company that a dividend has been announced
Early Mover Advantage: As of today, there are no other reports about this Company which will give us the advantage of getting early and making multibagger returns aka MultiReturns. This is “Something better than Perfect”
26