Simmonds Marshall : Value Buy


(Bharat) #1

Simmonds Marshall ,
Market Cap : 96 Cr ,
March 2018 Sales : 190 Cr ,
Profit : 10 Cr
Promoter: 57%
Sales Growth 3 Years: 9.21%
Profit Growth 3 Years: 10.38%
Sales Growth 5 Years: 13.93%
Profit Growth 5 Years: 23.24%
ROE around 15%
ROCE around 15%
Promoters Remuneration : Around 11% of Profits

Incorporated in 1960, it is promoted by Mr. Shiamak Marshall. It manufactures nuts and bolts for the automotive segment and caters primarily to commercial vehicle and two-wheeler manufacturers. The company’s manufacturing unit in Kasarwadi (Maharashtra) has capacity to produce 5,500 tonnes of nuts per annuum.

In 2011-12, Simmonds Marshall acquired M/s Stud India, which manufactures studs and supplies mainly to heavy commercial vehicle manufacturers. During 2013-14, Simmonds Marshall entered into a joint venture with Francis Kirk and Son Ltd (Francis Kirk; UK) to manufacture fasteners for the UK market; the manufacturing will be undertaken at Simmonds Marshall’s Kasarwadi plant and the products will be marketed by Francis Kirk.

Company has one associated company “Formex Private Limited” where it holds 49% share. Total investments in this company was around 12 Lakh while it reported a loss of 9 Lakh in Consolidated Statements of March 2018.

Financials :

Pros:
Established position in the domestic market and has healthy relationships with its customers for the last 10-15 years. Key clients include Honda Motorcycle , Ford , Fiat , Ashok Leyland Ltd , Mahindra , Suzuki.
Promoters have not sold any shares nor diluted the equity in past some years. Also they usually acquire around 20000 Shares every year since 2016 last being done in October 2018.

Negatives :
Very low Equity Float of 1.12 Cr shares of Face Value 2 each. Any Market crash or bad news makes it difficult to take an exit.
Limited Market Size as it provides only Nuts and Bolts to 2W and Commercial Vehicles and no mention of any diversification in Annual Reports.
Dependence on the auto sector and any downside in auto industry will directly impact the business of the company.
Working capital-intensive business due to higher inventory requirements as well as high receivables though the Receivables to Sales number are stable around 25% .

Rational For Investment:
At CMP , it is trading around 9X TTM PE. Annual Sales around 190 Cr and is available at Market Cap of 95 Cr. Increased consumption and favorable demand from Auto sector may aid growth for the company in future.

CRISIL Rating has more details on the company Prospects :
https://www.crisil.com/mnt/winshare/Ratings/RatingList/RatingDocs/Simmonds_Marshall_Limited_September_07_2018_RR.html

Disc: Invested


(Bharat) #2

ICICI Securities has a coverage on the stock with Target of 165. Though it is down around 30% from their recommended price (Rs125) dated April 2018.

Key Points :

Proxy on healthy automobile demand domestically (2-W, CV)
SML is a tier 1 supplier to automobile companies (~90% of sales) with other industry exposure being white goods, railways, etc. Within the automobile segment, in the 2-W segment, it supplies to all leading OEMs in India. SML derives ~20% its sales from the CV segment while it derives ~15% of sales from auto-ancillary suppliers (Tier-1). Thus, with domestic automobile industry on a robust growth journey amid rising per capita income and pick-up in industrial activity, SML offers robust prospects, going forward.

Robust order book; expansion underway to double sales by 2020
SML is operating at optimum capacity utilisation levels (~75 %+) thereby offering limited scope of growth. Sensing the capacity constraints amid robust order book (~| 24 crore/month currently vs. ~| 16 crore/month in the past), it is consolidating its operations and plans to incur capex worth ~| 35 crore over FY18E-20E. This will augment its capacity to attain a turnover of ~| 300 crore by FY20E, implying sales CAGR of 25% in FY17-20E.

Risks :

Slowdown in domestic automobile demand, transition to EV space may limit growth prospects
Any slowdown in the domestic automobile space, will limit the topline and bottomline growth at the domestic fastener players (including SML) with muted returns on the incremental capex spends. Currently, fasteners are used across the vehicle value chain including engines. Therefore, increasing prominence of electric vehicles (EV), which do not require engine, limits the use of fasteners and a loss of wallet share for the entire fasteners industry including SML.

ICICI Coverage Report : (April 2018)

Choice India Coverage Report (October 2017)

Key Point:
Large Customer base and low dependence on single customer: SML has a large customer base with top customers like Mahindra, Suzuki Motor, Honda, Hero Moto Corp, Bajaj, Ashok Leyland, Eicher Motor. However, with a diverse sales mix and product mix, any one customer does not contribute more than 10-11% of the total revenues of SML. This helps in de-risking operations and revenues from a single OEM . SML’s strategy for growth involves continuous customer addition

BOB Capital Markets Report (June 2017)


(EL) #3

Looks like clover is increasing their holding


(EL) #4

Disc: Not invested
I did a brief pulling of numbers on excel and AR/AP, etc seems to be well managed
Its a commodity with low margins nevertheless, please find attached all ratios.


(Bharat) #5

One of the Promoter of Clover Tech is a director in Simmonds Marshall. Though his increase in share may mean good prospects for business but it also gives an opening to possible insider trading. However i do not read much into it unless these entities starts offloading their stakes. Clover group looks a big entity in Pune with some Real Estate and other businesses.

The main promoters of Simmonds Marshall " Mr. Shiamak Marshall" and Mr. Navroze Shiamak Marshall" have many other businesses like Manufacturing of Rail Locomotives , {Poultry Farms and Real Estates (Both these are under liquidation)} , Automation Equipment and Coatings Business. It means less focus on this Listed Business but none of the unlisted business has any Product overlap with the listed one.

Also if one analyses the Related Party Transactions :

  1. Promoters have given loans of around 5.4 Cr at 8.5% Interest Rates . These loans have to be returned over a period of 5 Years with major payments in 4th and 5th year. Total Borrowings are around 23 Cr which includes 9 Cr of Long Term Borrowings and 14 Cr of Working Capital. The good thing is that these things have been defined in good details in Annual Report.

  2. There have been some high payments to the Related Unlisted Promoter entity for various job works. There is a 10 Cr payment to Formex Private Limited which is an associate company where Simmonds Marshall Holds 49% stake. Other major Payments for Job Works are for Coatings (1.5 Cr) and Rental Payments (2.67 Cr) to promoter entity. It seems Company has taken the Plant land on Lease from the promoters and it had to pay the lease charges. The expansion plans will also be only for Machinery while Land will be taken on lease from the Promoter’s Other entity. Though not able to understand exactly about the Lease future agreement. Any help would be appreciable @hitesh2710 @ayushmit Sir

simma

There is a strong correlation with SML posting sales with respect to corresponding 2-W sales growth. Slowdown in auto sales will impact the business.
It majorly supplies to OEMs and thus has low pricing power and thus fluctuating operating profit margins (though looks stable around 11-12% from last 5 Year) and Net profit Margins level around 4%-5%.

It should not be thought of a great company.
For me , the underlying thesis here is the undervaluation of the business as well as strong undercurrent in 2 W segment domestically with increasing income levels and increase in consumption. Those bullish on Auto Sector may play these types of business as Proxy provided they understand the risks associated. I believe the company is on a strong footing with robust prospects going forward for 2-3 Years.

Also the company has been paying regular Taxes at a rate of around 35% but it seems the company will be having benefit from reduction in corporate tax rate to 30% for companies with turnover less than 250 crore as announced.This may possibly help the Bottomline to some extent.


(KKP_Investor) #6

Just a quick opinion on the research shown above as well as my view from the chart and the news:

  1. Chart is forming an erratic pattern which shows that very few trades will decide the direction of the move and it is already something that an ‘investor’ should be concerned about as opposed to a trader.
  2. I would classify this stock as a trader stock and not for investment purpose until there is more liquidity, better trading, and many more institutions are involved.
  3. It is a small cap stock as mentioned earlier, and therefore should only fit a smaller % of Value Picker portfolios since it might be a ‘value trap’ being so small and having such as small float / volume.
  4. Being that the market has enjoyed a phenomenal move in Auto sector (look at many success examples), this stock has traded between a range of Rs60 to Rs135 (approx) in the last few years since the beginning of the bull market in 2014. So, there is something about the company somewhere that does not bode an all clear green signal.
  5. It MIGHT be best to wait for the stock to break out about 135 before investing more than 100 shares only cause it might drag you down, and if it a true automotive power house to become a big-cap, it will go to the moon after that point, since it might be something that has been finally discovered. So, what I am I saying? I am saying let the gains from CMP to 135 become a ‘test’ move, after which it should have rocket boosters to take it into stratosphere. Until then, have the doubts that you might have ‘correctly’ being a small cap, and unproven entity.
  6. Of course, all of the above is true for many Small Caps, but particularly in this case, since we have seen and enjoyed great moves in Small Caps in 2017 and a bit in 2018, but this stock did not enjoy those types of gains in a sector that had many other successes. So, find the ‘anchor’ around the neck of this stock, and AVOID for now.

Disclosure: Not Invested and Will Not Invest.

Just being honest in my assessment. Like any other investor, I might be wrong also, since no one knows the future. We are all at the mercy of probabilities when it comes to markets.

KKP


(Bharat) #7

I guess a trader should be more concerned with this rather than an investor. An investor looks at the underlying business and valuations and not at the price of share as contrast to a trader. Though ,no doubt that few trades may easily decide the moves on either side.

Can not be termed precisely as a Value Trap. The company has shown consistent growths on Topline while bottomline is affected due to direct co-relation with Auto Sector and thus cyclical. Though agree that these types of stocks should not form any major part of one’s holding. These are generally those high risk taking bets which provides an alpha to a portfolio. May differ from individual to individual depending on their style of investment. The good thing about the company is consistent dividend payments and no equity dilution with promoter’s increasing stakes every year. In bear markets , these types of companies (At low equity float and low valuations) looks depressed but once market sentiments turns , they can offer a quick 40-50% Gains.

The company deals with Nuts and Bolts. The market size is very limited. It can not be an Automotive power house. The thesis of investment is the current undervaluation and a proxy to ride the Auto Industry sector which in my opinion looks good for medium term with increase in Consumption and rise in Income levels as well as doubling farmers income.

Disc: Have been searching for businesses which looks good with good track record , clean management and are beaten down due to carnage in Mid and Small Caps and which can offer some decent up moves with improving market sentiments. This came up in the list and thus shared with fellow boarders. Better to focus on your own study and not rely on anyone’s thoughts as everyone have different risk taking abilities and different styles of investment. This does not look a core portfolio stock due to limited market size.

Regards


(KKP_Investor) #8

Sirji, investors also buy on a day when one has to look at the chart and the pattern, since buying a great business of great value at a wrong price, is still a bad ‘invested investment’. So, be careful.

Main issue with this Nuts and Bolts company with growing business is that it did not participate well in the Small Cap rally that we just finished. It did not participate with the sector better than the sector. Hence, in this correction, it is showly value, but is this value cause there is NO big money coming into the stock. Unless you see ‘money flow’, a good idea, remains a good idea. A value stock remains a value stock and never becomes a momentum stock.

So, I am just bringing up points to consider before investing Rs1000 or Rs10L. Of course, no one knows the future, so we can refute each other points, and one of us will be right on some fronts and wrong on other fronts.

Investors at VP and other readers need to consider this whether investing in this one, PnB, TataMotors, or the hot stock of today’s market which is Bajaj Finance (random names).

I got into some value picks when stocks were thrown out with the bath water in the last 2 months, and enjoying the ride up, and they were popular name stocks. There are SO MANY value plays out there right now that have big money coming in, that it is best to avoid ones where we have not seen it.

At the end of the day, I might see 100% increase, and your idea might get a 10,000% increase, but we do not know the probability and possibility here and now today. Time will tell, and it is the biggest test of time!

Just my 2 cents…Do you own thinking (readers).

KKP