Gateway Distriparks Ltd: Enter the Gate; Other stocks covered-Texmaco rail, Titagarh wagons and Hind Rectifiers

Gateway Distriparks (GDPL): This is one of the best plays on the growth of CFS and railway freight. 2nd largest player in railway freight after Concor (Although 2^nd place with wide margin as Concor has some 70% share), one of the biggest player in Container fright stations with annual capacity to handle 624,000 TEU. 

It is also one of the biggest in ICD (Inland container depot), most importantly its ICD’s are located in North-west corridors covering Delhi/Haryana/Gujarat which is the busiest route in India. ITS ICD’s are located near Gurgaon, Faridabad, Ludhiana, Mumbai, and Ahmedabad. It owned the lands of all ICD except Mumbai which is a JV although it is a smaller one. Owned land in these 4 ICD’s is 250 acres!! ICD will help it to capture the growth of containerized cargo post completion of Dedicated freight corridor (DFC).

DFC will be the game changer for Indian railway as it’ll enable Railway to capture the high share in freight business wherein road sector accounts for some 65-70% which is not economical and a big loss to the economy. Network congestion has resulted in the decline of the share of Railway in freight along with the fact that Freight rates are highest in India in order to provide cheap passenger services (which is plain foolish). 

DFC tracks will have average speed of 70-75 km per hour from the current 20-25 km and one rack on the DFC will be able to carry 13,000 tonnes of load compared with 5,000 tonnes by current racks entailing huge cost and time savings.So a major restructuring will happen post DFC. First DFC route is going to be ready in mar-18 from Ateli ( Haryana) to Phulera (Raj) and some major routes by Dec-2018.

So Gateway is best placed to capture this via its railway freight and ICD business which are having high entry barriers due to high setup costs (Land etc.) and long time. Gateway has invested significantly in the past few years in expanding its capacities in CFS/Railway and ICD business the impact of the same will accrue from now on.

Gateway holds 49.25% in railway freight business (GRFL) so its numbers are not getting consolidated with GDPL. Its railway freight business has turnover of around 800 cr and this qtr its NP has grown 140% to 19 cr. So this business will be a huge growth factor. Concor is the biggest player but still I feel GRFL will command premium valuations due to its much higher ROE as GDPL’s rail business is mainly in more profitable North-west corridor which allows for the double stacked cargo trains (GDPL has 67% double stacked cargo) which are more cost effective. 

Double stack trains are being used for nearly 70% of United States’ containerized cargo. But share is very low in India. Although there are weight consideration for tracks but double stack trains are beneficial when cargo is of larger but comparatively lighter weight like cars, automobile and electrical components, consumer goods and pharma products as compared to heavy items like cement/steel etc.

I am having Concor from 400 levels (CMP 1340) but still it is a buy although Gateway is way cheaper at present.

GDPL also holds 40.25% in snowman, earlier it was its subsidiary but GDPL share dropped after the IPO of Snowman. As Snowman is incurring losses for some time so GDPL is not getting much valuation from Snowman but this slowdown in Snowman is just transitory and it’ll see high growth this year. High growth in Pharma, Frozen food, dairy will benefit cold chains along with the govt focus on improving the agro supply chain for farmers.

I picked GDPL around 100 in 2014 but added good qty (as per my Investment target) around 220 last month or so. Its sep-17 qtr results are good. Group (CFS, Rail, Cold chain) turnover is up 10% 347 cr and NP is up 60% at 25 cr although snowman incurred loss of 4 cr. It is available at PE of around 25-30 which is cheap considering high growth future prospectus. Group turnover is around 1300 cr. It is a high dividend player and current yield is around 3% so we can expect high growth in dividend also when it’ll enter into high growth and profitability phase in the future. So today morning picked more at 240 and 260. At 260, it is still one of the great pick in logistic space.

Also going to buy Texmaco rail (CMP 112) and Titagarh wagons (CMP 140) as these two will garner high share in railway and metro sector as the demand prospectus of railway infra will be high. Earlier, these two were just manufacturing wagon which are low technology and commodity type of product but off late these two have augmented their capacities significantly and now they cover almost all the aspects of railway sector from wagon, Locomotive, Installation of tracks, security and electrical system.Apart from Railway, Texmaco is into steel foundry, hydro mechanical, bridges, Rail EPC (Laying of Track/electrical systems after the acquisition of Kalindee) while  Titagarh is also into defense, ship building, construction equipments, tractor segments.

Another stock i like is Hind Rectifier- I like its product profile, technical capabilities, management looks credible. They have good product profile catering to coming growth in railway electrification .They are venturing into new innovative products. Recently they have done right issue for expansion and i think this may turnout to be a very serious player in railway sector. Valuation is looking cheap at market cap of around 150 cr...CMP is around 105...good buy at these levels and at every fall.

(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).

Venky's India ltd: Results Update

Venky’s India has given us great returns so far. It is now trading at 2370; up 12 times from our entry price of around 200 (Click here for earlier Study). But I think it still has quite a way to cover and there is no reason for us to make an exit from the stock. I am still holding it tight.

Now coming to this quarter’s results-it has given a stunning performance. Its turnover is at 588 cr vs 596 cr last year. However its Profit before Tax is at 43 cr vs 1 cr and net profit is at 27 cr vs 35 lac last year!!! So a great jump in profitability. Market can have its own versions about topline figures for QOQ or YOY comparisons but over long term this growth story will gather even faster momentum. Chicken prices are still high but still demand is growing strong which is an indication that long term price trend may sustain at these levels. Apart from high end product prices it is further getting benefitted from falling raw material costs-mainly Soy and Maize. Maize prices have fallen all the way to Rs. 9700 (per MT) in Oct-17 from Rs. 12000 in June-16 (from Rs. 17000 in Oct-12). Similarly soy prices have fallen to Rs. 23300 (Per MT) in Oct-17 from Rs. 31000 in Jun-16.  Prices are likely to stay low due to better realizations globally amid stagnant demand in USA and other developed countries.

The impact of low raw material prices is visible in this quarter results-Raw material cost as a percentage of total turnover is down at 72% this quarter as compared to 81% last year. This is one of the prime factor in high growth in profitability and I think this trend will continue. And another positive thing which I am expecting since last year is the debt reduction. Its total debt has fallen to Rs. 290 cr from 470 cr in Mar-2017 and its interest cost has fallen to Rs. 11 cr this quarter from 20 cr last year and I am expecting debt levels to fall below 150 cr by next year. And with low debt levels I am also expecting high dividend payouts in the future which will further improve the valuation matrix. 

I think Venky will be able to touch NP figure of around 200 cr this year. Its ROE is great at 33%. So in my view Venky being one of the biggest in Poultry in India, high future growth along with superior profitability/Balance sheet profile should command a PE of 30 minimum. Venky is witnessing high growth in its Ready to Eat frozen chicken product business. These are available at every corner of India and I think this segment will see high growth in future. Last year this business clocked Rs. 153 cr as compared to 116 cr in 2016. Venky has an amazing product profile as all the products are interlinked- From one day chicken to full grown layer and Boiler, in house poultry feed business, Refined oil business whose by products are used in feed business. Its annual report is one of the best detailed one.

So at minimum 30 PE, Venky’s valuation is coming around Rs. 6000 cr while at present it is at 3300 cr. So we can expect another double from hereon. So just hold on and respect the humble chicken…

(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).

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).