Lokesh Machines Ltd: Tooled for Growth---------------- Results Update: Kennametal India

Lokesh Machine Ltd: Picked at 74 today. It is one of the most advanced metal cutting machine tool maker in India and deals in high precision CNC Machines, machine tools, jigs, fixtures and accessories needed for precision engineering. It is one of the most preferred suppliers to automobile industry and has clients like Volvo, Eicher, Honda, Caterpillar, Mahindra, Cummins etc. It is one of the top five Machine Tool Manufacturers in India and also claims to be “the first Indian company to deliver a complete range of special purpose machines of machine Euro 6 compliant cylinder blocks & heads” to Volvo. 

So it already has one of the best technologies in place for making sophisticated machinery not nut bolts. Keeping an eye on the growth opportunities in India, it is establishing relationships with global machine tech giants. In Jan-17, it has signed a landmark agreement with Tongtai Machine and Tool Co. Ltd, Taiwan, global giant in machine tool, to manufacture hi-speed vertical machining center model EZ5 for the Indian market as well for export market along with other hi-tech machines of Tongtai. 

In other significant tie up, in jan-17, it has entered into an agreement with EMCO GmbH of Austria for the manufacture and sale of next generation multi-tasking machines to expand beyond its earlier portfolio of automotive OEM. 

Indian Machine tools sector:

At present, Indian Machine tool market is around 10000 cr (Metal cutting tool industry is around 8200 cr) with domestic production having a share of around 43% ( In metal cutting it is 48%, rising against the imports in last 4-5 years from 42%) and imports contributing balance 57% which shows the scope for further capacity expansion by Indian players. Metal cutting machine tools are used for a variety of purposes like turning, centre machining, drilling, milling, grinding and gear cutting etc. And you’ll be surprised to know the name of the company out of some 100 organized players, dealing in most of the categories of machine tools…and the company is HMT Machine tools ltd which is a 100% subsidiary of beleaguered HMT ltd with turnover of around 200 cr!! HMT is not the biggest though in terms of turnover. Machine tool is the only running business of HMT and is the future focus area of the company and company has big big plans to be a Rs. 5000 cr company in 2020 and 10000 cr in 2025!!! Plans are OK but what about the Tools!! It is worth mentioning that the promoter of Lokesh machines Mr. Lokeswara Rao is a former employee of HMT.

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. 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, defense and consumer durables etc. will present big opportunities for machine tool industry in India. However, India is a very small player in global arena with metal cutting machinery production in India accounts for less than 1% of the global production. Again the leader here is China producing around Rs. 150000 cr worth of machine tools with Germany and Japan’s production around Rs. 80000 cr!!! 

Factors to spur the growth of machine tools industry in India:

Machine tools are at the core of manufacturing and without a powerful machine tools segment, manufacturing excellence cannot be achieved because all the manufacturing processes require the use of machine tools so this industry is the starting point for high tech manufacturing. 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. Moreover, high imports also present big opportunity of local producers. Actually almost 65% of Indian machine tools manufacturers cater to automotive industry so in order to meet the demand of other sectors like capital goods, engineering etc. we have no option left buy to go for imports.

Another reason for high imports is that India has manufacturing and technical capabilities to produce low to medium levels of machine tools like vertical & horizontal machining and turning centers but we are far behind in the production of multi-tasking and multi-processing machining centers which are basically CNC Machine tools with multiple axes that combine turning, milling, grinding, material handling and automation into one machine. 

Multi-tasking machine tools are required as most of the time a single tool will not suffice for part production and these multi-tasking CNC machines will finish the job perfectly. Actually in many industries where order from each customer is different (large variety) and small then it is very crucial for a firm to use its resources properly and accurately in order to meet the demand of every customer. For this one needs very flexible multi-tasking machines which handles large variety of operations and reduce the process time. These machines remove the material waiting/non-productive time which is around 30% of the total manufacturing time. Just in time (JIT) has been made possible because of these multi-tasking machines as manufacturer knew that he can quickly convert the raw material into final product so he doesn’t require to block his capital into costly inventories especially finished goods which is the costliest. Multi-tasking machines are more suitable for industries requiring a large number of complex parts like Aerospace and defense where India has high ambitions. That’s why I think Lokesh machines’ tie up with EMCO for manufacture of Multi-tasking CNC machines is a big move.

Computerized  numerical  control  (CNC)  machines were introduced in  the  1960s, which  utilized  digital  controls  technology  and  computers  to  control  the  movements  of  the machines  for  performing  the  metal  working  process.  CNC  machines reduced  the  human interaction and the need  for manual  work  to  make  complicated  mathematical  calculations  required  to  produce shapes with  high complexity and accuracy. These are now being paired with automation systems and simulation software to increase production. The growth of 3D printing has also increased the demand for CNC machines as CNC machines are used for the surface grinding and finishing of the 3D printed products.

 

Conclusion:

All in all, I feel stage is set for Lokesh machines to grow big and fast in the future. It is having gross assets base of 185 cr with 41 cr in capital work in progress but turnover is always in the range for 120-130 cr which shows the underutilized capacity. This capital work in progress figure is regularly around 30-40 cr for last 4-5 years. Inventory is also high at 95 cr. Both these always appear suspicious to me but as Lokesh is into the manufacturing of high valued machines which take around 3 months for completion so inventory (especially work in progress which is at 73 cr out of 95 cr) is bound to be high. Also capital work in progress figures are although at same levels but they are continuously moving each year. Lokesh machines have entered into tie ups with EMCO and Tongtai for manufacturing of new age machine tools and as per my understanding these new machines will be manufactured at a new manufacturing facility at Kallakal near Hyderabad so this work in progress may be related to this new facility although I have to recheck this one. At present the company has six manufacturing locations; five in Hyderabad and one in Pune.

Turnover is around 130 cr in last 4-5 years with interest (16 cr) eating out all of the PBIT of 19 cr resulting in low NP of around 2 cr. Still, It has paid dividend regularly from 2006 to 2016 only to miss 2017. However last June-17 quarter topline growth was good at 38 cr vs 28 cr in June-2016; this may be due to recent tie ups with EMCO and Tongtai and we can expect decent show in Sep-17 quarter results. It has invested big in 2011-12 for new auto component plant (cylinder blocks) in Pune. It has also invested in new auto component and machine tool manufacturing unit in AP. It is yet to see the full impact of these expansions into its top as well as bottomline.

Promoter holding is at 51.26% out of which around 38% is pledged although debt of the company is secured by the raw material and assets of the company so I think shares are pledged by promoters for their personal issues. Not a good sign but I have seen even the reputed group pledging and releasing their shares all the time like Zee and Tata group although there is no comparison between Lokesh and them. Still, pledging is more dangerous in companies which are heavy into losses and high debts. Pledging of shares is not that serious issue for companies which are reasonably profit making with low debt and Lokesh is just one like that. But still I would like to devote some more time in assessing the promoters although to me the company is looking reasonable in corporate governance and worth taking the chance. I have invested today at 74. Will update later on if anything material is found. But still a risky one so invest only risky part of your portfolio.

Result Update Kennametal India: However our another pick in the machine tool sector, Kennametal India, has started showing good growth in both topline and bottom line for last 2 quarters. Earlier advised around 570 ((click here for earlier post) This quarter, its topline is at 183 cr vs 163 cr last year, PBIT at 15 cr vs 6 cr. I have done good buying around 600 levels and just 2-3 days back added at 660. Today in falling market, it was up 8% to 708. A re-rating candidate and I feel can still be bought at these levels for long term.

(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).

Oriental Hotels ltd and Asian Hotels (East) Ltd: Right time to Check in

For me, hotels means PRS Oberoi, the owner of world renowned Oberoi hotels (listed as EIH). He is a man of passion, extreme focus on details, energy; he is the one who has absorbed hotels into his soul. I have shared enough details about the man in this Blog (Click here for the post) and holding EIH ltd from 56/- levels since 2013 and no plans to sell it ever. Global hotels giants could not muster the courage to enter India for decades only due to the presence of PRS Oberoi in India as nobody can match the premiumness, customer care and experience of Oberoi.

Last year, PRS Oberoi decided to shut down its New Delhi property for 2 years for up-gradation and renovation. No sane businessman has the courage to do this; shut down a property for 2-3 years instead they do the renovation in patches in order to preserve the business. But PRS Oberoi doesn’t like distractions, even minor ones. After witnessing the growing competition in New Delhi market, he has planned his master strategy to re-create the magic in its property by spending some 300 cr and to bring the splendor into his hotel he has hired Adam Tihany, a New York-based designer and architect known for his work on the Four Seasons in Dubai and the Mandarin Oriental in Las Vegas.

Market saw this as big risk and stock price fell by almost 20% to 100-110 levels. New Delhi hotel was generating 200 cr topline and almost 25% of the total profits of the premium hotel chain. So I was hoping that after the results of sep-16 quarter, which I was thinking to be bad, stock price might fall to 90 levels and that would be great entry price for a devotee like me. But EIH smacked my plans with high growth in other hotels and crossed 150 recently. I am also holding Indian hotels from 50 levels and applied for the recent right issue at 75.

Indian Hotel Industry to grow at brisk pace and visible signs

So after paying homage to Mr. Oberoi, I think time has come for us to check into other hotels. Hotel industry in India has seen some very tough time off late but I think signs of revival are now here. But nothing could have stopped the stunning growth story of Indian hotel sector from happening which at present is very small compared to the size, growing income levels and changing taste of young Indian travelers. To put the perspective into figures; India currently has less than 1.2 lakh hotel rooms although even New York is having room inventory much bigger than this!!! For a population of around 1/4^th of India, USA has around 36 lac hotel rooms!!! So there is no doubt that India is going to be the global hot bed for growth.

India is going to see its per capita Income growing from some Rs. 50000-60000 at present to Rs. 130000 by 2020. India is going to be the youngest country of the world and as seen in recent times, current young population love traveling and exploring big time and this will pave for the high growth of Hotel industry just like the same has happened in USA, Singapore, China etc.

The lure of travel and tourism is visible from young Indians if we look at the figures of outbound travel; every year some 60 lac Indians go abroad and this figure is growing 25% each year!! Plus Indians are big spender also…the average Indian traveler spends $1,200 per visit as compared with Americans who spend about $700, and Brits who spend $500. So India and Indians are changing fast. Better hotels, air connectivity and awareness will divert and create the demand for local tourism big way in India.

Indian Government has started the facility of e-Visa on arrival to 16 airports to 161 countries as compared to 113 countries earlier which has resulted in the high growth in foreign tourists visiting India like from Jan-16 to Apr-16 the figure of e-visa tourists grew from 1 lac to 4 lac. Even during demonetization period in Dec-16 the figure rose from 1 lac to 1.6 lac!!!

Still, Indian hotel industry is marred by high taxes wherein hotels and tourism sector is taxed at around 30% in India as compared to low 8% in other Asian countries like China the impact of this neglect by Indian Government has been reflected in low foreign exchange earnings wherein China picks somewhere around$150 billion from tourism while India languishes at $30 billion. Still the sector attracts the most FDI (Foreign Direct Investment) inflow and is one of the biggest foreign exchange earners and accounts for 7.5 per cent of the country's GDP. If our Government can think wisely then the potential of growth in foreign exchange and employment generation is immense mainly due to India being one of the best tourist destination due to its geographical diversity, big number of world heritage sites and global yoga and spiritual destination.

So due to above factors and initiatives along with economic revival has resulted in the strong growth in hotel sector in India. Around 65% of hotels in India are currently at their highest level of occupancy since 2007, according to a report from consultancy HVS. The average room rate (ARR) is also at a four-year high, currently near Rs.5700. The rise has come after consecutive years of decline in the ARR.

Some analysts doubt over the growth and revival of hotel industry due to high capital costs and low returns. But there is always a "First time" for everything, transformation and structural shift. Just the one we are witnessing in the Airline stocks which were always considered bad for being capital intensive and low return. But recently, even the likes of Warren Buffet have realized the transformation of globe into a village courtesy better and cheap air connectivity...and Even WB invested in airline stocks although he was against them for whole his life.Hotels are just like Airlines...at 50% occupancy they are bad business...65% good, 75% is super and above 75% all calculations disappear.

High costs also keep competition lower. India is also witnessing high consolidation in the sector where weaker hands are selling the hotels.

Travel/Tourism is the fastest growing sector globally contributing 10% of global GDP and 1 out of 10 jobs. No wonder global giants like Hilton have picked India as a place for expansion for next 10 years and they are not investing for earning 3-4% return. For long Global investors kept on thinking that the likes Airbnb would stall the Hotel industry but still hotel Industry shown high growth. There are even talks of Airbnb to list hotel properties also which will help the both. Airbnb is also facing the issues of tax avoidance and lax safety measures in its rooms which enable it to compete with hotels.

The revival in the hotel sector has also been visible in the recent results of hotel stocks but still most of these stocks are lying cheap and yet to caught the fancy of investors. Actually due to inherent complexities, the hotel sector is one sector which is first to bear the brunt of an economic slowdown. This is due to the fact that most of the expenses (some 70%) of hotels are of fixed nature like rent/depreciation, Staff costs, repair and maintenance, furniture etc. So in an economic downturn people and businesses first of all cut the travelling and lodging costs which impact the hotel industry hard. 

But this fixed nature costs are the reason which brings the high growth during periods of growth, revival and consolidation in the industry. As most of the expenses are fixed, so in case of business revival and rise in the occupancy ratio most of the incremental revenues go to the bottom line. This is called Operating leverage. So during the periods of revival, hotel industry witnesses much higher growth than the GDP.

So I think it is the right time to invest in hotel stocks. Oriental Hotels and Asian Hotels (East) appear to be the great picks:

Oriental Hotels: It belongs to Tata group and operates around 9 properties in Chennai, Madurai, Coonoor, Mangalore, Kovalam, Visakhapatnam, Kochi and Thiruvananthapuram. Most of its hotels are at tourist attractions. The company is available at a market value of 700 cr when one of its prime property Taj Coromandel, Chennai is valued more than 700 cr!! It was having around 90 cr as freehold land in its books out of which it transferred some land parcels costing around 32 crore to stock as it is planning to sell these in order to cut debt. We can imagine the market value of these land parcels.

Also, it has invested Rs. 110 cr in the iconic St James Court hotel near the Buckingham Palace which was acquired by Indian Hotels in 1980. I am yet to confirm but Tata group is looking to exit most of its international hotel business and the value of share of Oriental in this property alone can be around 400-500 cr. So it can wipe out its not so big debt of 300 cr very easily.

Now coming to the signs of revival in the business. In sep-17 quarter results, I think market has missed something very important. It clocked the turnover of 87 cr vs 77 cr last year. Its profit before Interest and tax is at 6 cr vs 4 cr. But last year, there was other income of Rs. 3 cr so if we remove this then the last year figure of 4 cr will become 1 cr. So this quarter it has shown a jump of 6 times in its PBIT. And as we can see this is due to Operating leverage as most of the incremental turnover of 10 cr has gone to bottom line. But stock price is still languishing at pre-result levels and I think market has missed something here. But I grabbed the opportunity and picked good quantity around 38 levels. My entry price was at 34 earlier this month.

Even in its difficult times, it is still managing to distribute dividends and current yield is still at .5%. This quarter it has shown Rs. 3 cr profit at net levels from the loss of 1.5 cr last year. Any update on sale of land for debt repayment will spur the big re-rating. It has not much performed much this year as compared to not so good other hotel stocks. Not to be missed opportunity at CMP 38.

Asian Hotels (East) Ltd: More to follow….

(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)

In Search of the Miraculous: Capability---KPIT Technologies.

This is in continuation of our earlier post on picking companies with great capabilities.

I just love this company and it was advised earlier also in this blog (Click here). Off late bought a good quantity of this one around 110-120 and it has been advised regularly to email group. Amid all the "Hulla gulla" about the high growth of electric vehicles in the "FUTURE"....this company is actually doing electric vehicle business at PRESENT. Its EV Buses are running at parliament, MOU for 100 buses for PUNE smart city, Ludhiana is also under way.

It has secured more than 20 patents for EV Bus...developed Lithium battery in house in India…these buses are equipped with KPIT's Integrated Intelligent Transportation System equipped with vehicle tracking systems, wi-fi, CCTV, vehicle health monitoring, fare collection etc. Already some 1000 buses are running in Pune with its GPS system installed in them. KPIT has great capabilities in IOT and this Intelligent Transportation System (ITS) for buses is an example of IOT. These will transform the public transportation system in India from dirt filled buses to AC high tech buses available on our cell just like OLA/UBER. 

Indian Govt has serious plan to convert low grade public transport system of India as we don’t have other choice either just like China which has around 97% share in EV Bus industry. This success has its link with China's desperate need to deal with its pollution. Their schools, factories were at the edge of closure due to pollution.  The same thing is going to happen in India as well as at entire globe.

An imported electric bus costs about Rs. 1.75 crore whereas the one converted indigenously by KPIT will cost about Rs. 60 lakh, the price of which is likely to be reduced further on technology advancement

At present not much is being talked about KPIT but it has real capacities that too working at present. KPIT is working with CIRT and other concerned authorities to further refine this technology as well as the necessary certifications. KPIT will have 2 working models, working with OEMs and Retro-fitting existing vehicles.  They are already in talk with OEMs regarding ’embedding’ their technology.

Public transport consumes high volume of fuel and the same is rising due to high traffic which reduces the mileage further resulting in the increase of fuel costs like Mumbai spends around 18% of their operational costs on fuel while in Bengaluru it comes to 38.6 per cent. Since power supply is cheaper than fuel, the savings on fuel and the investment on the electric vehicle will balance each other out in the long run. So I think we’ll see some concrete steps by Govt on public transport. 

The issue with EV is only the high cost of batteries although the same is falling fast and may soon be costing way lower just like the prices of solar cell has fallen in last 5-6 years. Still different models can be used to lower the cost of batteries like a bus will need a big battery costing big amount but after the life of battery for Bus is over we can use the same for E-rickshaws or for small capacity solar power system. Also, cost is higher for higher capacity but where there are cases where buses are doing short runs like 100 KM a day then there is no need for big costly batteries. Most of the city buses may fall into this category, a company bus for employees will also fall into this.

 KPIT has already developed great capabilities in making connected factories where everything from raw material, inventory, processing, plant/machinery repair etc. is connected with IOT system. Manufacturers are getting the importance of IOT revolution in making their factories Smart. They are deploying advanced technologies such as sensors or connectivity devices, software applications, big data, analytics, cloud, 3D printing to build ‘smart factories’ that drive process improvements in areas such as supply chain, transportation, communication, housing, energy, and production. KPIT, for example, has designed KwikPick, an augmented-reality, hands-free warehouse picking solution with a wearable glass that guides picker in real time about the location of the item on a shelf, automatically scans bar codes, etc.

 

KPIT has created a number of products and solutions for smart factories which are easy to use in noisy, busy and always-on environments. Based on industrial IoT, they provide visibility on the reliability of assets, optimise supply chain, and enhance customer and employee experience. Some of the supply chain optimisation solutions include a supplier portal, KPIT warehouse management system, KWM, AR-based warehouse picking solution, KwikPick, intelligence mining tool, Akoya, mobile field service solution, K-Fieldserve, mobile proof of delivery service, ePoD and intelligent transport system, ITS and many more .

KPIT has turnover of 3500 cr with NP of around 250 cr…so it is not a small duck. Its very strong engineering vertical has TO of 1300-1400 cr and KPIT is a global partner for vehicle giants. EV vehicles will have much larger and complex electrical systems which will surely benefit KPIT. Its product and platform business vertical which also includes EV is relatively small with some 150 cr turnover but KPIT has made big investments in the past for this and is now primed to extract the most out of it. 

KPIT is not and should not be treated as a traditional IT company because of its business being related to product development and engineering design…another proof is that KPIT doesn’t hire people trained in IT language like Java/VB but engineers with Btech/Mtech having IT exposure. And I am sure one day market will realize its strength. KPIT is trading at a PE of just 10, Dividend yield 2%, cash in the books 530 cr, market cap is around 2300 cr with revenues of 3500 cr, has around 60 patents, all these indicate it is a big re-rating candidate.

Last day its results came out and it has beaten the market expectations big time. Market was expecting a flat turnover of 877 cr but it has given 916 cr, market was expecting EBITDA of 74 cr but it has crossed 100 cr, market was expecting NP of 45 cr but it has earned 60 cr. I think market was expecting lower due to expected hike in employee costs but the company managed to cover the same by increasing their top line.

Institutional investors are buying this one off late and I think after last day’s results we may not be able to see it at 150.

(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)