Solitaire Machine Tools Limited (SMTL) as the name suggest is from Machine Tooling sector (subset of Capital Goods industry).
SMTL came on my radar while I was playing around with the Screener and I found it interesting enough to initiate a small position in it as it fit well into my long tail kind of investments that I can’t allocate much to at present but don’t want to ignore either.
Manufacturer of Precision Centerless Grinders and Double Disc Grinders.
Provides Rebuilding Services too (in short refurbishing old grinders)
Products are primarily used by Automobile, Auto Ancillaries, Textile Machinery, Steel and Bearings industries.
SMTL operates from its registered office in Mumbai. It has two manufacturing units in Vadodara, Gujarat (India).
Centerless Grinding operation is a mass production (for mass production of small components like pins, bushes, needles, medical implements, crank pins, pistons, motor shafts and cutting tools) process in which cylindrical components are ground without reference to center. This operation is used as the final process in majority of the components where the tolerances and the quality parameter are stringent.
CMP – Rs. 44.45.
Current Mkt.Cap.- Rs.20.19 Crs.
Promoter Stake - 45%
Company Url.- http://www.smtgrinders.com (for a microcap website is good)
Client list - http://www.smtgrinders.com/our-clients/ (good client list)
Management Profile - http://www.smtgrinders.com/corporate-profile/
Screener.in hyperlink for SMTL
All numbers below from Screener.in:
FY17 Nos. - Sales = Rs.18.34 Crs., Operating Profit = Rs.2.99 Crs., Net Profit - Rs. 1.40 Crs.
Export Composition to Sales - 40%
TTM PE - 13.11 (there was a write off of investments in US subsidiary in FY 2017. Excluding this write off the EPS would have been a bit higher, hence PE would have been around 11 or so.)
P/BV - 1.73
Div.Yield - 3.08%
Div. Payout - 48.46%
Debt - Nil
Current Mkt. Cap to Last 5 years OCF - 3.72 times
ROCE 3 year Avg. - 16.06%
Working Cap Days - 32.53 days
Cash on Books - Around Rs. 2.80 Crs.
FY17 OPM - 16.30% (Last TTM OPM - 18.41%)
Last 5 years Avg. OPMs - 15.94%
1. Exclusive Licensee of CINCINNATI MILACRON USA (considered Grandfather of Grinding Machines, but I don’t think this exclusivity gives SMTL any advantage as such).
2. Licensing arrangement with BOCCA & MALANDRONE SUNEBO S.p.A of ITALY in 2007.
3. Technical Know-how from Laboratorio Eccellenza Italiana from Italy for Double Disk Grinder.
4. Technical tie up with Oerrepi.
Competition and R&D-
1. Majority of the competition in global markets comes from foreign players and foreign players dominate this space. Don’t have much idea on domestic front but this looks like a space where there may be lot of small players domestically (needs further digging).
List of major global players can be found in this link.
2. SMTL manufactures products that does require some innovation and R&D efforts. These products also are customized as per client requirements. For all this SMTL needs to work in close collaboration with the customers, take constant feedback and provide not only product but product as solution. All this however is applicable to and is also done by all global competitors in the industry (assuming that domestic competitors must also be doing this).
Market size, Market growth and Market Share-
Wasn’t able to get all these numbers (needs digging).
Web Links that I came across having info on SMTL.
http://www.engrreview.com/solitaire-machine-tools-ltd-performance-driven-grinding-solutions/ (Good detailed description of company)
http://www.mtwmag.com/innovations-centerless-grinding-machine-operations/ (On innovations and RnD)
https://www.pnbnet.in/itc/rmdcrisil/Industry%20Risk%20Score%20april%202017/Machine%20Tools%20Feb%202017.pdf (Machine tool sector report CRISIL)
Risks (Please add other risks that I may have missed) -
1. Exposed to Forex fluctuation (Forex inflow is much higher due to exports as compared to Forex outflow, therefore appreciating INR is beneficial).
2. RM costs and imported parts cost rise (although this doesn’t look like being a major issue).
3. Demand and fortunes tied up with Capital Goods industry.
5. Illiquidity as volumes are very thin and few hundred shares itself can result in a sharp movement of share price either ways.
6. Other risks associated with micro caps.
Observations from 2017 AR that are kind of maybe negative or need to be digged further into (Below are not necessarily a negative comment on management but just observations) -
1. Travelling expenses for such a small company seem high at Rs. 23 lacs.
2. Sales commission increased by 3 times to Rs. 41 lacs. Almost all of this increase can be attributed to commission of Rs. 29 lacs. made in foreign currency in FY2017 (there was no sales commission in foreign currency in FY 2016). Exports %age as part of Sales was on similar lines as that of FY 2016, so wondering why a sales commission payment in foreign currency when exports %age remained same.
3. Buiding repair expenses increased by Rs. 13.5 lacs., from around Rs. 1-2 lacs. to Rs.14-15 lacs.
4. Don’t know much on Investment write off in 2017?
SMTL has done well in last few years despite the overall slowdown in capital goods industry and lack of private sector investment.
Scalability is normally an issue with such small companies in general and especially in this sector and hence getting a view on Market size, its growth and competition is important.
But the impression I got after reading about SMTL was that its products are of good quality and have been gaining acceptance in export markets.
Management claims to deliver product quality which is at par with best if not better but at much lower costs and this can be a real differentiator going ahead for SMTL.
Management calls themselves as conservative and says should grow at 15-20% CAGR. I think they might be able to do better if they are able to do well in exports market and recovery in domestic market would be an additional kicker (focus on aerospace and defense sectors may open up additional opportunities too).
Above things coupled with decent valuations, cash on books and other numbers were enough for me to initiate a position in SMTL.
Please keep adding your findings and resultant views to this thread if you maybe interested in this story and dig more info on this.
Solitaire AR - Mgmt. Commentary.doc (682.5 KB)
Discl: Invested with 2% of PF. Initiated position in last 30 days. Have vested interests and views maybe biased. This is not a recommendation to buy or sell. I am not a SEBI registered research analyst or a research analyst for that matter . Please do your own due diligence before investing. I may buy more or sell (fully/partially) at anytime without posting on this forum.