Solitaire Machine Tools (micro cap stock in machine tools sector)


(hrfacebuk) #1

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%

Collaborations/Tie-ups -
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)
http://www.mtwmag.com/customization-process-higher-productivity-key-getting-bigger-market-share/
http://www.vifia.com/modules.php?name=Video_Stream&page=watch&id=2532&d=
http://www.vifia.com/modules.php?name=Video_Stream&page=watch&id=2558
https://machinist.in/index.php?option=com_content&task=view&id=288
https://machinist.in/index.php?option=com_content&task=view&id=1229
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.
4. Competition?
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?

Investment Hypothesis-
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 :slight_smile:. Please do your own due diligence before investing. I may buy more or sell (fully/partially) at anytime without posting on this forum.


(Samir) #2

@hrfacebuk
Interesting analyis:

Re point 4 from AR2017: Investment w/off appears to be of the Subsidiary shares of JBM Machinery Corporation.

Rgds,
Samir


(Samir) #3

One of the red flags i see is the inventory carrying and the costs associated. They seem to be carrying a finished grinder on their books for the past two years. It shows up in the Inventory as Rs.65,81,250 for both years. The Mgmt commentary talks about non-lifting by the client. Not sure what dispute is there - or if there are advances received against it. or have they booked it as sales. Not sure though from the Advances side of the B/S as well.

R


#4

This company at prima facie looks very interesting, Management seems to be conscious about slow and steady growth which is apparent from their cash flow, leverage and return ratios. Management commentary is quite positive after many years now, The fact that they have done capex after 4-5 years also reflects their confidence in near term visibility,Definitely a stock worth to explore in depth

Also as we know that the tax rate is reduced from 30% to 25% for companies less than 50cr turnover, this company will get benefited (Assuming same PBT as next year, Just this 5% tax break will increase PAT by 7-8%). So inline with management positive commentary feasible bottom line growth would be around 25% to 35% in FY18


(Chaitu) #6

Company recently performing well and have good dividend track record , i bought it an year back for the below disclosure about promoter capital allocation skills from last year AR

Disclosure: Invested from much lower levels.


(hrfacebuk) #7

@Samir701

Yes write off was due to JBM Machinery. However I haven’t been able to dig further into details about this subsidiary, hence said don’t know much about this write off.

Mgmt. did say in AR that this inventory has been lifted by clients in Q1 of FY. Not sure the reason behind this delay in lift off but as long as it gets cleared in a quarter then its fine I think. Not sure if these are domestic clients as its possible that they avoid lifting in last quarter of FY. But again if these are big clients then the amount involved is not much as compared to their size, so again not sure why this inventory build up in last quarter of FY.

@mahe9703

Yes, I had this point in mind but forgot to add in the initial note. Thanks for highlighting.

Haven’t had the time to dig further on Solitaire story though. Would be interesting to see the results going ahead in next few quarters.

Cheers.

Discl.: Invested and no change in position since the initial thread was initiated.


(nipunmohta) #8

I saw Mr Pratyush Mittal’s name in top 10 investors in Mar 17 AR. But as per December shareholding data his name doesnt appear in list of shareholders owning more than 1%. If this is the same person then maybe @pratyushmittal can throw some light on his rationale of buying into this stock.


(sandeeprao) #9

Q3 results are very good…


(hrfacebuk) #10

Yeah good nos. Continuity is the key.

http://www.bseindia.com/xml-data/corpfiling/AttachLive/ef9c4c75-90b3-4acb-a35e-65ae851f8aac.PDF

Discl: Same as in my last post.


(nitin.verma) #11

Disclosure: invested recently at 66 levels and adding
Below are my thoughts about solitaire:
Pros:

  • The company belongs to the machine tools sector which is a proxy to capital goods sector which may see an upside owing to governments push on infra projects. the company’s major source f revenue is automobile sector which has been growing well and with BSVI norms may potentially keep growing in the foreseeable future. As per the AR 13 in engine valves practically entire operation is met by the company

  • the company has been able to grow exports well from 23% of sales in 2012 to 40% in 2017. This augurs well for such a tiny microcap being accepted by major global players. the last AR talks about a satisfied german customer for which they designed a grinder for their india plant and there is a good chance they may do so for their worldwide use.

  • major part of non financial liabilities is customer advances: currently 10% of sales which though has come down from a peak of 21% in 2014. it could be the norm in the industry to take some upfront payment but it still makes me happy

  • overall cash flows have been managed well over the last 10 years.

  • company has been generous in dividend pay out - currently it stands at 2% which is great for a sub 50cr company. Along with that it has remained debt free all these years. The short term debt was also paid out in 2016.

  • capex done through internal accruals: fixed assets at 7.15 cr

  • has always maintained a healthy cash balance. currently 3.19 cr ( including other bank balance in septh2017 balance sheet)- though it may lower the ROE

  • Asset turns have improved from 1.35 in 2013 to 2.57 now ( fixed asset turns) with improving gross and net margins.

  • ROE in upward trend- trailing ROE is 14.8% now from 12% in march 2017

  • good corporate governance: loans to relatives have been paid back last year

Cons:

  • erratic inventory days. The company carried a grinder worth 30 lakhs on its inventory for one year in 2013 and now another finished grinder for 2 years. I am not sure whether it has been delivered as the last balance sheet shows jump in inventory to 4.2 cr from 3.6 cr

  • contingent liablities: company seems to have furnished a bank gurantee of 1.15 cr(? for what?) which has risen since last year value of 83 lakhs

  • high renumerration of KMP : 29% of net profit


(Ranjan K) #12

Disc: Had considered @ 40, but could not work more that time.

Apart from general infra push that you have mentioned as the growth driver, do you have any specific data point on what is gonna happen big which could not happen in the past…what would be the key growth driver going ahead? I don’t think they have done any major capex? Any idea about capacity utilization as of now? Thnks!


(ASHOK SHAH) #13

This doubt get cleared when you attend agm or meet promoters.
Please visit Co and see plant and get all doubt cleared from promoters as shareholder


(rajsuccess) #14

@nitin_verma, @hrfacebuk, anyone following the results? I noted yoy is not bad but poor results for the quarter. I could details of reason or any management commentary. If anyone has info please share.


(hrfacebuk) #15

Did see the results and wasn’t enthused by it. In such small companies one can’t expect quarter on quarter good performance and maybe some benefit of doubt needs to be given for a one off performance like this.
I had bought it with 3 years point of view and continue to hold the same quantity as disclosed in initiation thread.
Haven’t had the time to dig up the reason for such results in Q4 or to check with management on this as yet. Will try to do so and will post here if have any update.

Cheers.


(rajsuccess) #16

Hi, will be grateful if you share any insights on the Q4 Results and what’s lying ahead (growth plans paying off etc) @hrfacebuk