Wednesday, 13 June 2018

Stock Updates: Lokesh Machines, Kennametal India, Hercules Hoist

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 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 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).

Tuesday, 5 June 2018

Indian Economy and Stock Market Update: Just Bear the Labor Pain

These are the troubled days for Stock market especially for small and midcaps but these types of corrections are normal and serious investors do not lose their sleep over it. Indian economy is not doing that bad and there is still room for much higher growth if and only if Govt has the will power to move from projects to policy reforms; from slogans (Make in India, digital India) to the real ground work because I think Make in India is failing big time. Make in India was launched to make India a manufacturing power house and to provide jobs to millions of unemployed people. Indian Growth story so far was not inclusive at all and poverty is everywhere.

 Growth of Industries and manufacturing is required to provide employment to these bottom of the pyramid low skilled people. Make in India aimed at providing 10 cr more jobs by 2020 but reality at the ground is not that bright and one of the main reason for low investments in Industrial manufacturing is the British era un-supportive labor and land laws. Long awaited Labor and Land law reforms are still pending and these are vital for the success of Make in India as in the absence of these, Labor hiring and land acquisition is a messy task. 85% of Indian manufacturing firms employ less than 50 workers. Apart from Labor and Land law reforms, Agriculture supply chain reforms are the biggest policy push which can give the massive dose of muscles to the economic growth.

Draconian Labor Laws: Biggest hurdle in the industrial growth 

Large number of labor laws in India (45 central Govt and more than 100 most of the times contradictory state laws) make it very difficult for businesses to retrench in case of slowdown and adoption of new technology like Industrial Disputes Act of 1947 states that a firm with 100 employees or more cannot close down without government permission. It was the industry friendly labor laws which prompted the gigantic scale of investments in manufacturing in China. FDI investments in large scale manufacturing in India is way below China (in initial years of China). In spite of large number of unnecessary and unfit labor laws India, just 10% of the workforce is in formal sector while the other 90% works in conditions devoid of basic employment benefits. In spite of low wages, India still is not a global manufacturing powerhouse. India's share in global manufacturing is just 2% compared to 22% of China. This just shows that something is horrible with our Industrial and labor laws. so it is quite an irony that in spite of so much Hulla-Gulla only 10% of the workforce is covered by these large numbers of Labor laws.

Current status of Labor laws motivates firms to remain small or to focus on capital intensive industries. That is one of the reasons that our Industrial sector is very small compared to other developing economies. Share of Industry sector in GDP is around 17% (still at these levels for last 25 years) while it is in high 30's in economies like China, Thailand, Indonesia. India's manufacturing prowess is limited to auto and engineering sector but we are lagging big time in others like India is a big importer of Electronics goods (Including components) like Laptops, Mobiles, TV’s etc. The value is big and it is expected to cross even our oil imports in next few years. The Net import of Electronics goods is massive around 3 lac Cr which is closing in with oil import (Net of exports) fig of around 4 lac cr. 

Our IT sector has grown big because most of the labor laws are not applicable on them (but on Industries) as they enjoyed exemption from them by the Govt but now labor department has decided to not to renew the exemption. 

Land Acquisition and Agriculture supply chain reforms

Land acquisition has been marred by the misconception that this will hit our agricultural production and food security and will exploit poor farmers when the reality is that India is never short of farm land in fact we are 2nd largest farm land country; second only to USA. 60% of India's land is agricultural land. Our farm land is 35% more than China but China’s productivity is way higher than India…in some crops it is 4 times…2 times in rice!! And this is one of the issues plaguing Indian agriculture apart from Supply chain due to which farmers do not get adequately paid. Most of the farmers have land holding around 1 acre only which leaves no scope for mechanization and economy of scale. It is better if the lands like these are consolidated under contract farming by corporate houses or sold for industries (wherever possible) providing jobs to farmers. Our farmers with such a small holdings can only go for subsistence farming and they'll remain poor till their death. 

On the other hand, Israel, whose 60% land is desert and rest is arid, has transformed its agriculture from deficiency to biggest exporter of high value agri crops. They recycle some 80-90% of municipal waste water for agriculture, 90% of land is under Drip irrigation, Desalination, use of most modern techniques and R&D…Israel is a power in agriculture now and is studied globally for their success. India now has no choice left but to follow Israel. Our water levels are dwindling fast (Part courtesy free power), chemicals fertilizers have turned land toxic, Intensive cropping has made land devoid of any nutrients and organic material like humus. India uses drip irrigation just for 5% land whereas Russia has 80% and Brazil has 50% coverage. No doubt our Governments have failed miserably in true Agricultural reform for past 30 years. The growth that we have seen has just dragged the future production into past/present (Through excessive use of water and chemicals) and our water levels and Lands have lost productivity fast.

Agricultural reforms are the biggest route to India getting 10% growth rate. And it does not mean free power, subsidies, high MSP, Loan waiver as these are the reasons for the sorry state of the agriculture. More than half of our labor is in farms but share of agriculture in GDP is 14%...down from 19% a decade ago due to higher growth in other sectors but this also means unequal distribution of growth/income as most of the poor are still poor. As around 60% of our population depends upon Agriculture so you divide the low agricultural production by 60% population and you'll get that most of the India is poor and income inequality is high; further in terms of workforce involvement we are still a Primary sector economy. Our low industrial production levels of 17% of GDP also explains the reason for our rural population to remain indulged in subsistence farming as there are no jobs for them in manufacturing sector. We need to move this large labor from farms to industries which is not happening in India.
Govt has put too much effort in controlling but lesser efforts have been put in the creation. Job creation is low and success of Make in India is vital for job creation. Agriculture productivity and pricing will grow the rural economy fast and balance out the unnecessary cereal production substituting the import of Pulses/edible oil. MSP has “cerealized” the agriculture of India and we need to break that now at any cost. 

As shared in earlier posts also, i see Agro supply chain as the next big revolution happening in the Indian Agriculture. Crop wastage is huge and farmers do not get the full price for their crop. So cold chain and warehousing infrastructure (Snowman Logistics), better price discovery mechanism like Commodity trading exchanges (MCX), short term loans against warehouse receipt (Kiran Vyaapar), reforms in the state AMPC Acts are some of the steps to ensure the low wastage and better pricing for farmers.

Government is already on the Job

Fiscal discipline has been good so far but now there are real dangers as Oil prices are rising, RBI may raise the Int rates to counter the Inflation which will further hit the already ailing banks. Private sector investments are low due to credit limitations of the NPA hit banks and this is one of the reasons for low job creation. But Govt is now focusing on equity investments in the banks and this may ease some pressure; also private sector banks are in much better shape.

There is no doubt that Demoney and GST has hit the economy hard, even the present high GDP numbers are not showing something very important- the de-growth in INFORMAL economy which is the biggest victim of Demoney and GST recently so I would take the growth in GDP with pinch of salt. There is another case that some of informal economy (due to demoney/GST) is getting reflected in the mainstream figure but at the micro level nothing much has changed.

As is the experience in the past, growth rate of 7-8% raises the Inflation in India because we lack the supply systems to support this type of growth. Another reason for our better growth, better CAD, better fiscal discipline was the low commodity prices globally especially Oil, coal etc. and the recent spike in Oil prices is the real test of our economy. Also, 8% growth rate of India and 2% of USA are not comparable at all and not a moment of relaxation for India because the likes of US are matured economies with very low poverty and unemployment but India needs 8% just to take lakhs of people out of poverty. I have no doubt that this growth rate is not revealing the terrible income inequality in India because  Indian businessmen still prefers (due to draconian labor laws) highly mechanized factories than labor intensive factories like apparels (90% textile firms are small scale with less than 8 employees). They prefer casual workers to whom they can hire and fire as per their need.

So still, much work is pending on the policy front. But on the other hand, we have encountered tough droughts in last 2 years and still been able to keep inflation under control. This year, rains are expected to be good. Govt is working on ease of doing business especially on Labor and Land laws. Modi Govt has abandoned the most disputed Labor law clauses like Govt approval for sacking a labor etc. Modi Govt is working on much improved business friendly industrial relations bill. 

Further, these policy reforms with GST and Insolvency code will spur the FDI investments in India. Global giants are looking to build manufacturing units in India. Govt is also working on much awaited FDI policy 2018 which will set the tone for much needed investments in India.

As we can see, India is marred by policy and not by other constraints and this for me is the biggest hope for India. BJP Govt is getting hit recently due to issues like Oil prices and other issues but I still feel that they are the best for this policy reform job and have the aggression and daring for the same. I have no doubt that in spite of current noises BJP will win in 2019 elections. And this is the minimum stock markets require: a stable and Strong government.

Stock Updates:

So I am still buying in small amid the current turmoil in the market. Today picked Narayana Healthcare at 223 (best pick for Healthcare), Laurus labs at 455 which is poised for strong growth in the future as it has made big investments in the recent past which are yet to contribute to the topline although their operational costs like salaries, Depreciation and interest costs are hitting bottom lines. Picked VA Tech wabag at 428 which is a stunning water tech company with around 100 patents, current working capital and order issues are temporary and we need to see the gravity of water problems in India to realize the full potential of this company.  

Also picked Zee learn at 34 who have fallen in spite of the great results due to market apprehensions about its acquisition of MT educare but its management has come out in the open to explain their business and reason for buying MT so in my view it is still one of the best education company in India and deserves investment. Picked Praj Industries at 84 which is going to see big activity due to coming Ethanol policy and Praj may secure big orders for 2G ethanol. High Oil prices makes it logical for our government to promote ethanol which will help in realizing the twin objectives of curbing oil imports and raising farmer incomes.

Snowman Logistics: Picked more at 45. Agri supply chain is the next big thing in Indian Agriculture. India wastes massive quantum of Agri produce due to non-availability of cold chains and warehousing. And whenever i try to find something related to it i always find snowman as the best candidate (Not to forget Kiran Vyapar). I also try to find value in Future Supply chain (I am holding its parent Future ent) but Snowman is available very cheap compared to its asset base (which is the real earning potential). NP profile of Snowman gives a very misleading picture...loss of 3 cr on 200 cr turnover but Its EBITDA is strong 50 cr (25% margin). Its Depreciation is massive at 40 cr; higher than employee cost of 20 cr!! It is the result of its recent expansion plans.

FSCL has EBITDA of 120 cr on turnover 800 cr (15%) but cold chains require more investments in Plant and machinery so assets base of snowman is higher than FSCL even at much lower turnover. I am also planning to invest in FSCL because I like the management skills of Biyani. FSCL is getting secured business from the very strong group retail business although this has resulted in comparatively higher working capital days. But at PE of 40 FSCL is a good one. But Snowman is available just around its replacement cost plus most of its capacity is yet to be fully utilized especially warehousing.

It has recently tied up with IKEA for managing supply chain of IKEA’s in-store giant sized restaurants in India. IKEA derives around 5% from restaurants business globally but they are targeting 10% in india and building one of the biggest restaurant in the world comprising 1000 seats in Hyderabad. Snowman will manage the Pan India supply chain.

India is doing great in sea food exports for past some time and the stocks like Avanti has given great returns. AP does the sea food exports from Krishnapatnam port and Snowman has just completed recent cold chain facility there (Operational Since Feb-18). So this is a big opportunity along with agriculture and Biopharma for Snowman.  I have invested in Linde India (Global giant in freezing gases i.e. Cryogenic freezing technology apart from Gases for Steel industry) also due to their plan to invest 500cr for cryogenic freezing plant in AP. These are indirect plays on the growth of seafood industry in India.

(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)