Lokesh Machines: It was shared earlier at 74 ( Click here for earlier post). At that time the company was in revival mode and as expected it has shown great improvement in results this year and it appears to be on strong recovery path.
Machine tool industry will be one of the biggest beneficiaries of revival in manufacturing, Automation and Make in India initiative. This year its turnover is at 175 cr vs 132 cr, PBT at 7 cr vs 3 cr, a reflection of strong recovery and much better time ahead. Lokesh does not just make small machining tools but large high tech CNC machines which contribute 61% to its topline.
Earlier, its capacity expansion mistimed with slowdown in auto sector resulted in it being saddled with debt of 125 cr and high inventory. But now with revival, It has cut down its debt this year further by 12 cr to 70 cr out of which 64 cr is working capital loan. Its inventory levels are generally high as it procures orders for large CNC machines requiring 3 months for completion but i think we'll see more improvements this year.
As shared in earlier post, machine tools are at the core of manufacturing and without a powerful machine tools segment, manufacturing excellence cannot be achieved. This is evident from the fact that major manufacturing global powerhouses like China, Japan and Germany are one of the best high precision and sophisticated machine tools producers. So if India dreams to be a manufacturing destination then we need to invest significantly in machine tools because high tech machines can’t be produced by hands.
Lokesh machine is one of the very few in India who can produce HMC machines (Horizontal machining centre) as India meets 50% of its demand of HMC machines from imports. It is only Indian and few among global to manufacture machines for Euro 6 engine platform.
At present most of the demand for metal cutting tool machinery is from automotive sector but with the thrust of government on make in India, demand for newer sector like railways, defence and consumer durables etc. will present big opportunities for machine tool industry in India.
So i think Lokesh deserves a place in Tier 2 (risky) portfolio along with Kennametal. I have done good buying of it during the recent fall from 80 to 55. Avg now is 63...today picked more and i am in last stages of buying as i think it has fixed its tools.
Kennametal India: It is a global giant in machine tool industry. it was shared earlier at 570 ( Click here for earlier post). It is also in a strong recovery zone and posted stellar performance this year. It has fallen all the way from 1000 to 750 levels. I have utilized this opportunity in adding more of it regularly around 720-750 levels. Now Avg is 620 and I am almost done with my buying. Mar quarter turnover is at 198 cr vs 165 cr last year, PBT at 27 cr vs 10 cr. Full year topline is at 565 cr vs 476 cr but major improvement is in PBT of 56 cr vs 25 cr. I think this one will post net profit of around 60-70 cr this year and at market value of 1600 cr it is trading at 20-22 PE which is very cheap for a global giant. Must be a part of Tier 1 (High quality/Safe) portfolio.
Hercules Hoist: It was earlier shared at 160 ( Click here for earlier post). It is a Bajaj group company dealing into Hoist pulley systems for a variety of Industries primarily under Indef Brand. It was under my watch for long time.
Actually after GST, demand for very large warehouses with size up to 5 Lac Sq feet, will rise. Presently majority of warehouses are small (As companies are required to be present in every state to save the extra Inter-state taxes) with no economy of scale and no automation whatsoever. But GST will make large companies like Suzuki, Hero, Nestle to have one large strategically located warehouse covering a large geography, say in Nagpur for catering to entire western India market. These gigantic scale warehouses will bring in economies of scale in logistics and supply chain. So the demand for Automation will be huge to cover the scale of operations.
This is where i think Hercules can get big business as it is already into Material handling and material retrieval products. Growth of other industries will also spur the high growth in the future.
At CMP of Rs. 126 its market cap is 400 cr but it is having stocks of various Bajaj group companies like Bajaj Finserv, Bajaj Auto, Bajaj Holdings and Bajaj Electricals and MF valuing 250 cr, has 2 acre vacant land in Mulund in Mumbai (I think it should get around 70-80 cr). So out of 400 cr, 320-330 cr (80%) belongs to Investments and land. So we are getting the rest of the company with one of India’s best material handling brand for just 20% (80 cr). It earns around 10-12 cr as dividends from these investments which provides the stability to the bottom line. It is operating around 1/3rd capacity so any improvement in the top line will add significantly to the bottom line and this is a strong re-rating candidate with nil debt and high free cash flow generation capabilities.
Like other Industrial input stocks, it also had to face the slowdown in the core business. But this year was the period of revival and It has shown improved results so far. During last 2 quarters, Its turnover has been increased to 43 cr vs 29 cr. PBT at 5 cr vs loss of 30 lac. Material handling and warehousing automation industry is witnessing strong growth. GST is expected to bring high level of automation in Warehousing sector and Hercules will be one of the biggest beneficiaries. It is still not in the radar of the market.
With improvement in its results, it has announced dividend of Rs. 1.25 this year (Re. 1 last year). Bajaj group is a generous dividend distributor and we can expect liberal dividends in the future when it’ll witness full revival. I made my initial entry at 160 but luckily during recent correction it went down to 105 levels and I am buying it regularly from those levels. Today done another buying at 125...Avg now is 130.
When buying companies which are in revival mode, i prefer staggered buying approach...buying at every improvement even at much higher price and at every slide during market corrections. This implies not aiming for perfection in entry price but perfection in entry time. Following this approach, there are some stocks like Clariant, Schneider electric in which i have not made further investments after initial entry as these have not shown any improvement in the results...so i am waiting just outside.
(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post).