Menon Bearings: Gaining Traction both operationally and stock wise

Menon Bearings ( MBL), a Menon Group company was established in 1992 and is one of the few companies in the continent having fully integrated manufacturing facilities under one roof, to produce a wide range of critical auto components like bi-metal engine bearings, Bushes & Thrust Washers for light & heavy automobile engines, two wheeler engines as well as for compressors, refrigerators, air conditioners etc. The company started its commercial production in April 1993.

MBL is listed on the BSE ( Bombay Stock Exchange ) & is globally positioned with business activities spanning 24 countries around the globe. Exporting 35 % of its production capacity, with exports growth at more than 25 % per annum, the engineering capabilities at MBL enjoys strong brand equity among leading OEMs all over the world.

Menon Group is a multi-product, high end critical auto components group with a turnover exceeding Rs 300 crore & globally positioned with business activities spanning 24 countries around the globe exporting 35 % of its production. The Menon Group’s historic commitment to quality and customer service, strong corporate values, disciplined & professional management systems, emphasis on trust in business relations & its ability to meet special needs is recognized the word over.

MBL manufactures a whole range of bi-metal engine bearings, bushes & thrust washers for light medium & heavy automobile engines, 2 wheeler engines as well as for compressors & for refrigerators & air conditioners.

Product range of the company includes:

Bearings
Bearings for Connecting Rods
Bearings for Crank shafts
Flanged Bearings
Trimetal Bearings
Bushes
Truncated bushes for Connecting rods
Ball indented bushes
Bushes for Connecting Rods
Cam Shafts, Rock Shafts
Rocker Arms
Thrust Washers
Washers with Thrust
Face Contours
Ring Type
Thrust Washers.

This information was gotten from their home website. This particular stock popped on one of my screens, and seemed quite interesting.

Fundamentals

It is a micro-cap with a total market cap of 478 Cr, that has suddenly beginning to show improving OPM’s from 15% in 2013 all they way upto 27% now.

ROE has increased from 25.37% in 2012 to 31.46% in 2016.
ROCE has increased from 17.61% in 2012 to 25.94% in 2016.

TTM Profit at 17.36 Cr
TTM Sales at 118.69 Cr

Although I feel ROE and ROCE in excess of 15% is itself good enough for most companies and extremely difficult to maintain in the long term.

Operating Profit Margins at 26.08% (2016). Highest levels over the last ten years
NPM at 13.4%(2016)
Debt to equity at a manageable 0.24 having come down from 0.69 levels in 2012.

The stock has also strong dividend payouts in excess of 30% over the last ten years. This seems to indicate that they do value the interest of minority shareholders as well.

With the expected pickup in the auto ancillary space, I feel this may be a multi-bagger in the making especially at the current juncture. I feel it’s not too expensive currently at 4 P/S for a firm with a high profit margin doesn’t seem like a lot to me. More than that I feel the long term value creation is more important, and if this stock is capable of delivering profit and sales growth in excess of 15-20%, the stock returns may eventually be rewarding.

CAGR Sales over 3 Years 10.22% (This is still a bit dull, I look for a minimum of 15%)
Profit CAGR over 3 Years 61.83%
Promoter Holding 74.67%

Please do provide your insights into this company.

Thanks,
Prashanth

1 Like

Menon Bearing has come out with good growth in both Q1 and Q2 of FY17.

Just a word of caution that, it is currently trading near its higher valuation band.

Disclaimer: Holding and planning to buy on any correction that takes the price below 75.

Hi,

Read the post on Menon Bearings. If you look at the cash flows of the Co in the last 5 yrs, there is hardly any surplus cash generated by this Co. Also growth is very slow given the industry it is into…secondly having an EBIDTA of over 15% for a small size Auto Ancillary coupled with no cash flows may suggest that the Co is capitalizing some of its PL items.
I would rate this Co expensive at 26PE… or would buy only after digging deep into its P&L numbers and cash flows… which might not happen only with Annual report.

R
Amit L.

About 50% of revenues with related parties. I would rather stay away.

1 Like

whats unique about the products or the company? Many such auto parts companies around

Are the high ROE or ROCE a temporary blip…are they sustainable?

Can you please elaborate on the 50% number? From the annual report of 2017, I can only see 22% sales going to related parties.


Source: Annual Report 2016-17

Sales to related parties is ~ 28 cr against total sales of 133 cr.

Hi Yogesh,

The comment was in 2016… so you will have to look at 2016 AR… however the figures are similar. Check the enabling resolution for related party transactions.

As per 2018 Annual report it is just 13% related party transaction. Looks good to me. PE 15 ROE & ROCE is almost above 25% but price is keep moving downward. Also last two years cfo was good.

company seems to be the best company in bearings space going by sales growth and ROCE over the last decade. However, a big red flag emerges from Cash flow statement (CFS) - there is no outflow of taxes going by CFS. as per P&L company’s tax liabilities come to a cumulative sum of 50 Crores over the last 10 years however, company has only paid 7 crores going by CFS.

A bit of googling on this topic threw the following news article which talks about Axis bank freezing the bank accounts of menon bearings as the company has one common independent director with Gitanjali Gems.

No outflow of cash for tax liability seems a bit scary to me.

best - rajat

1 Like

Hi, I’d like to correct myself on tax outflow point here.

Company’s cash flow statement starts with PAT as opposed to PBT which is usually the case. Because of which they have not mentioned taxes separately. And I ignored this changed reporting pattern and assumed there is no cash outflow for taxes.

Thanks to one of the VP participant who pointed this out to me.

Now, to know cash outflow for taxes, is there a way to know this from annual report?

best - rajat

Any one tracking this company? On the paper it looks really good considering last 5 years of track record. It fits following criteria.

Profit growth 5Years > 20 AND
Profit growth 3Years > 10 AND
Profit growth >10 AND
YOY Quarterly profit growth > 10 AND

Sales growth 5Years > 10 AND
Sales growth 3Years > 10 AND
Sales growth > 10 AND
YOY Quarterly sales growth > 10 AND
Return on capital employed > 15 AND
Return on invested capital > 20 AND
Return on equity > 15 AND
Average return on capital employed 3Years > 20 AND
Average return on equity 3Years > 15

Add to this, the capex which can bring further growth if demand sustains. The debt level is also very low.
The concern however is that its a small cap and lots of related party transactions generates fear. Has anyone done any research on management quality and track record?

consistent and healthy ROE and ROCE do speak well for management though.

2 Likes

Capex:

+The company has done a capex of INR 8 crores for the brake shoes and the brake segment.

  • A total capex of around INR 30 crores is planned for two existing segments, which will be done in a staggered manner by FY25.
  • The company plans to fund their capex internally, with a marginal debt if necessary.

Market Share:

  • The company has a healthy market share of 20% to 25% for the bi-metal segment.
  • In the brake segment, they will carry OEMs aftermarket STOs having an existing supply network and a strong relationship with the OEMs.

Growth Plan:

  • The company expects growth in coming quarters to be fueled not just by the brake segment but also by Alkop growth as it is a premium margin segment and has more scope due to customization needs.
  • The company expects to grow revenue by 20% in both segments in the coming years.
  • Menon Bearings is targeting a growth of 20% in both bi-metal and alkoxide segments.
  • The company’s target is to reach INR 100 crores in business within the next three years.
  • The company plans to expand into the aftermarket, state transport undertakings, private transporters, private operators, and OEMs.
  • They also plan to tap into the export market potential of around INR 6,000 crores, with a focus on expanding into countries like Argentina and European countries.
4 Likes

Menon Bearings Q4FY23 concall highlights

  • Manufacturers and exporters of bi-metal components, aluminium-casted products. The company has recently ventured into a new segment of brakes
  • 3 manufacturing facilities all located in Kolhapur and 1 warehouse in USA
  • Manufacturers bi metals which are highly critical moving engine components that operate in high
  • temperature and pressure. Inside engines with high payloads."
  • Manufacturs Alkop (Aluminium castings)i.e critical alloy parts for auto and non-autousage
  • set upplant and machinery to manufacture brake lining and brake shoes, which are made from ecoantifriction asbestos-free materials.
  • Clients in auto segment : LCV and tractors
  • Non auto clients : refrigerators, pumps, oil and gas pipelines and other customized products
  • Clients are Cummins, Honeywell, John Deere, Concentric pumps, etcetera
  • No single customer contributes +10% of revenue
  • In-house machine building capacity, resulting in cost savings
  • Present in 24 countries with 1000 dealers and distributors
  • The domestic market size for bearings is around INR1,000 crores , company has a market share of 20-25%
  • Aluminium castings products market size is Rs6000 crores
  • Brake segment market size is Rs2000 crores, , market share 20-25%
  • The commercial production for brakes has started in Q1 FY24,
  • Capex till FY25 in 2 existing segments of Rs30 crores will be funded through internal accruals. Out of which 60% will be towards aluminium division i.e (60k sq ft factory) and 40,000 sq ft in bi-metal
  • Demand will bounce back in coming quarters due to volumes from brakes and alkop growth (premium margin segment due to customization needs).
    In Alkop segment, revenue grew by 29% while volume grew by 6% due to introduction of new products which are value added in nature.
    "In bimetal division, auto sector is a prominent one i.e almost 80% is
    automobiles. "
  • In Alkop division, auto sector 50% and industrial 50%
  • Exports for bi-metal fell due to slowdown in Japan companies (major one). Howver, in USA the business is growing
  • EBITDA margins of 24-25% were clocked due to introduction of VAP products,company is confident in sustaining it.
  • Brakes busness margin will be 18% and company is targetting to fetch Rs100 cr in within 3 years.
  • Brakes capex were Rs8 crores , revenue potential will be Rs25-27 crores in FY24.Increase of 30-40% YoY in coming years.
  • Expecting better enivornment from Q2FY24 for both the segments (YoY growth +20%) going ahead.
  • Brakes business will be catering to after market (900 crore), aiming to fetch 15% of it
  • Conversion ratio as said from receipt of RFQs to the actual start of business and commercial production is about 80% to 85%
  • The company states that they are 100% sure that they will be growing by 20% on YoY basiseven after braking business coming in stream.
  • In brakes business, after enetring into after market company will be foraying into OEMS by adding additional stream of line which will cost around Rs1.5-2 crores
  • In exports, US and Japan has the largest share then African countries and Dubai
  • Key competition in braking business are Rane Brakes. Rane Brakes and Hindustan Composites
  • In bi-metals , company is exporting to USA, Japan, Korea, Mexico, Netherlands, and we can continue till Europe and Russia are weakened."
  • registered with 50 plus distributors now. All over India. So, after market, then state transport undertakings, then all transporters, private transporters, private operators and then OEM.
8 Likes

Read about the business and sharing the notes below since price chart shows optimism.

Investor Presentation, 29th April, 2023

  • Revenue Mix (FY23) Bi-Metal Products: 73% Aluminum (Alkop): 27%
  • 30% Export Revenue
  • Revenue from exports declined due to slowdown in exports to Japan for bimetal products, which we anticipate to normalize in the coming quarters
  • As our products are gaining more recognition, our share of sales through OEM’s is up significantly in the last 2 years [Up by 70%]
  • In house Machine Building Capability to Design SPM, Tooling, Gauges & Fixtures, and Tool Room for faster Development. Significant savings in Cost and competitive advantage over peers
  • Catering to Industries & Applications which will have low impact from change in shift to Electric Vehicles | Long standing relationship with potential EV players to cater in Future

Q4 FY ’23 Earnings Call May 02, 2023 [first earnings call]

General:

  • Management: ARUN ARADHYE – WTD AND CFO
  • 100% sure to grow at least by 20%
  • Capex: 30 crores by FY25 | see the business on the horizon | internal funding with marginal debt | 60% for Aluminum and 40% to bi-metals division| Post capex revenue potential will be ~400 Cr.
  • Started in 1994, 3 mfg. plants at Kolhapur, & 1 warehouse in USA | Export 24+ countries | 1,000 dealers/distributors & 10,000 retail outlets across India | No single customer > 10% of revenue.
  • In-house machine building and tooling capability. Products have long and highly collaborative development cycles, require testing and validation and critical in nature, requiring high gestation period for supply approvals. High entry barrier in the industry | Limited number of players
  • EBITDA margin improved because of more exports and value-added products. Sustainable even after realizing full revenue potential, considering lower margins of brakes business.
  • RFQs conversion rate ~ 80% to 85% | Timeline of 10 months from the receipt of RFQs to actual start of business | RFQs à samples à commercials à audits. à Samples for testing
  • Exports 100% auto- HGV, LCV | Exports margins~ 3% to 4% more than overall margins.
  • Policy to declare 40% of the PAT as a dividend.
  • Segments: Tractor 30% | HGV 20% | Brakes 17% | Transmission 10% | Replacement 8% | Raw material and strip supplies 12% | Others 3%. Brakes & Transmission- Supply to Brakes India or Automotive Axles.

1. Bi-metal division:

  • Components: bearings, bushes, and thread washers for engines
  • 80% is auto | Installed capacity per Annum 516 lakh units | Utilization ~ 70%
  • Mkt Size: Domestic - 1,000Cr (market share of 20% to 25%) | Exports - INR6,000 crores.

2. Aluminum (Alkop) Die-Cast division:

  • ~ 50% is auto | better scope for growth due to customization needs
  • In FY23, revenue growth ~29% versus the volume growth of 6% due to new products and accepting critical components, low volumes but high value
  • Installed capacity per Annum 1,440 metric tons | Utilization ~ 70%
  • Mkt Size- 6,000Cr. for auto and non-auto (refrigerators, pumps, oil, and gas pipelines)

3. Brakes Segment:

  • New Segment | Started from Q1FY24 | Capex of 8 Cr for a revenue potential of 25Cr. | EBITDA margins 18%~19% | Brake shoe and lining for L/HCV | Replaced every 15,000 ~ 40,000 kms.
  • Installed capacity per Annum - 15 lakh units for liners, and 2.4 lakh units for shoes
  • Mkt Size- 4,000Cr. Out of that 900 Cr. replacement mkt
  • Limited competition | 1st target aftermarket using existing network and later OEMs.
  • Additional growth will require nominal capex. Additional line costs ~2 crores
  • key competitors- Rane Brakes and Hindustan Composites
  • Will take six months to develop market | Intend to reach 100 cores business within three years.

AGM Presentation, 27th July, 2023:

Observations from the FY23 AR:

  • MD 80 Yrs. Old | Executive Chairman - Key Person. I sense that he is grooming son who is working as Assistant to the Chairman
  • Sales to Related Party: 23% of sales in FY17 | 14 % of sales in FY23

Financial Statement Observations:

1- Sales, Operating Profit and PAT alongwith their CAGR:

2- Balance sheet with Key Indicators:
image

3- Sources of Funding and Usage of Funds:
image

4- Cash conversion Cycle:
image

5- Sources and Usage of Operating Cash flows: Statement of Cash flow does not list paid taxes. However, the statement starts with PAT instead of PBT (common practice). I think that the business does pay taxes and the entry is missing only in the statement of cash flow. Who can dare to reward the shareholders in the form of dividends but ignore the government?
image

Valuations:

Currently at the upper end of the historical valuations range. With 2-year fwd. horizon and expected growth and OPM, valuations seem fair as of now.

Conclusion:

A good business to track but not a good investment at this juncture due to prevailing valuations even after considering expected growth and OPM for the next 2 years as compared to the historical valuations.

Data Source: Screener, Company’s Public Filings
Disc: No position. Shared for collabrative learning.

11 Likes

@Surender

Thank you, Sir.

I do not want to derail this thread so pardon me & pls consider this as a silly question of a novice investor. But can you pls help me with an existing thread which can help me calculate & understand valuations like you did here?

I am fairly new to the world of investing and want to learn how to understand the fair valuation of a business.

Thanks again.

Hi- Below links might put you on the right path:

2 Likes

@Surender Thank you Sir

For brake lining segment:
Hind Compo & Rane both are not doing anywhere close to 3x asset turn, how Menon is guiding for 25cr topline from 8cr investment, difficult to understand. Is replacement mkt the trigger? If any info, pls share.

1 Like

Even on margins, the brakes segment is not attractive. Rane, Sundaram are making single digit operating margins. But in the Q4 FY23 concall, the management said they will make 18 – 19 % EBIDTA margins.

It is not clear on what basis they said they will generate 18-19 % EBIDTA margins, so I wrote to the management. They replied that 18 – 19 % are gross margins. Then when I pointed out that they had earlier said these are EBIDTA margins, they replied that “since the set-up and project is new, other expenses are less and hence there is little difference between Gross & EBIDTA Margins”.

Overall, looking at Rane Brake Linings or Sundaram Brake Linings, brakes does not seem to be an attractive segment to get into.

(Disc.: No positions)

6 Likes