Steel Strips Wheels Limited - Attractive Valuations

There revenue for the June quarter grew by 11% YOY basis and net profit by more than 50% YOY basis.

check the result here…
http://corporates.bseindia.com/xml-data/corpfiling/AttachHis/8E0C89AE_69EB_402E_A0E5_F10842AE3C74_144459.pdf

For the month of July their revenue de-grew by 6% in value term as they had to pass RM drop close to 20%.

Hi Vaibhav,

So my question is are they failing to pass on this RM cost to their Customer? If this has been the case then it raise a serious concern for long term since RM price fluctuation is very obvious in this sector.

I don’t understand your question. They have passed the RM drop not RM increase…

RM price drop(with a lag) was passed…this can be good thing too…as when RM price increase that will also be passed…

SSWL bags USD 55 Mln Exports business from USA

One of the biggest order in the history
This order mark the entry into North America and make way for more big orders.

http://www.bseindia.com/corporates/anndet_new.aspx?newsid=bbeb9e6e-7ee5-4928-b204-712d5dfbdc8c

Good run up in the stock price since discussed levels starting from 320 levels.
Is it time to book profit?

booking profit is on your own conviction… SSWL is adding aluminum alloy wheels with a JV (Korean company - dont remember the name). after quick googling, it appears to be that In india, we import majority of the alumiunum alloy wheels (from Indonesia or China) and there are not many big players… so In my opinion- there is a huge upside from current levels in a medium to long term horizon.

Disclosure - invested

SSWL is expanding capacity at its Chennai Location.

From the AR -
Your Company is also setting up an additional manufacturing facility for the manufacture of Steel Wheel Rims for HCV and LCV segment on the
land available at the existing manufacturing unit of the Company at Oragadam, Chennai with an initial capacity of one million Wheel Rims.
Approx. 9 Acre land is available at the existing Chennai unit of the Company for setting up this manufacturing facility. Major portion (i.e around
50000 wheel rims p.m) of the output of this proposed manufacturing facility will be used for the supply to Bharat Benz at Chennai. As, the
Chennai unit of the Company is located near to sea port, there is huge potential for Export of Tubeless type Steel Wheel Rims to Europe and
South America. The proposed facility will be equipped with modern technology and will meet the international quality standards.
Total investment for setting up the said manufacturing facility will be Rs.165 crore and is expected to commence its commercial production by
March, 2017. The said cost will be funded through internal accruals/equity and partly by term loans.

More info about the CV project at Chennai location -

Commercial Vehicle Capacity Expansion
SSWL saw a signicant expansion in its domestic market presence in CV segment over last 5 years and achieved major business allocations
from all major CV makers. The existing capacity of 1.60 millions faces challenge to make way for meeting exports demand. India being one of
the most competitive nation while competing on manufacturing & cost capabilities. SSWL has decided to expand its CV segment reach by
putting up a green eld expansion plant in Chennai with its existing facility. This facility will be adding close to 1million wheel capacity to SSWL
portfolio. This facility will cater to growing demand from south region customer and exports to global shores. The growing shifting of tube type
wheels to tubeless wheels will be catered by this factory which will have state of art technology and automation systems to compete with best
factories in the world. Globally 22mn CVs are produced every year with the industry growing at 3-4%, there is enough space for cost competitive
global supplier.

Isn’t there a value trap of low margins->high utilization->capex->More debt ? Or is the margin enhancement the answer to this vicious circle and unraveling of value? (with products like alloy wheels)

Does anybody know how much is the domestic versus export margin?

Nonetheless fantastic discovery and kudos to all the contributors.

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Very good questions pointed out by Anand. I was also looking for the same. Hope this below article meets some of the query.

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Thanks a lot krishna. Perfect answer.

It is now ready for export to all plants of PSA. I truly believe it is a no brainer investment opportunity.

[Disc: Already invested and will try to add more]

Another good order received. Earning visibility is strong.

http://www.indiainfoline.com/article/news-top-story/steel-strips-wheels-gains-after-order-win-steel-strips-wheels-share-price-116100700317_1.html

Most of there clients are well known auto companies. Waiting for the alloy wheel plant to start operations. Holding it from 340.

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Can someone confirm how the management is ? I heard that SSWL management integrity is at doubt/ its bad. Please provide your valuable inputs if someone has interacted with the management. I also heard that its all operators play , the current rally.

Can somebody help with reading this?
http://corporates.bseindia.com/xml-data/corpfiling/AttachLive/842F911E_701D_483F_ACFC_21EEA99835CF_082133.pdf

Are the pledged shares sold by the trustee company here?

New plants will be operational from June 2017.
Alloy wheel plant in Gujarat with a capacity of 1.5mn wheels
CV plant in Chennai with a capacity of 1mn wheels

According to the management, the revenue potential for the alloy wheel plant is 400cr and Ebitda margins will be 20% as compared to 13% for the existing operations.

Coming to the investment side, Capex will be 330 crore. Company has a working capital capex of approx 16% of revenue for FY17.

Thus, total capex will be around 330 + 16%*400 = 394 crore

Ebitda = 20%*400 = 80cr

D&A, I have taken as a percentage of sales. So, in 2017, it is approx 3%. Since, it is new plant, we can assume higher D&A, so i have taken it to be 4%

Thus, Ebit = 80-(4%*400) = 64cr

Tax rate for the company in FY17 is 22.6%. taking the same

Nopat will be 50 cr approx

RoCE = 50/394 = 12.6%

Existing RoCE has been 10%

So, even new plants will not bring in much cash flows for company having debt/equity of 1.4 to pay the debt

Thus, I want to ask experienced members of Valuepickr, What should be the valuation or multiple for a company having low RoCE, high debt but high PAT growth expected in future. The problem with sswl is that it is a extremely capex heavy business and they have to do heavy investments to generate revenue.

I am a new investor holding Sswl from 550 levels.

4 Likes

Very interesting analysis Karan. Thank you!!

I would add what i think of this company below:

  1. The RoCE of 12.6% that you have established is just for Year One. Assuming the order book keep improving and the exchange rate turns and little more favorable, RoCE would only improve in the future. 2. We are all betting on the future of our economy(both by way of formalization as well as increase in the per capita disposable income) and the assumption is that premium products will turn less price elastic as years pass by, which would lead to better demand and increased pricing power for companies which are dealing with relatively premium products like alloy wheels.
  2. In SSWL we can see some real high quality investors and a management which knows what they are doing - which in the long run is a deadly combination.
  3. Investment is all about taking some calculated risks and my assumption is that the investors in SSWL would be happy do additional equity infusion once they start witnessing the growth.

As a small investor, investment in SSWL is a relatively safe bet - while it may not be a multibagger, i am working with a 15-20% CAGR kind of growth story.

Disclosure: Invested in SSWL.

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Does anyone know when the alloy wheel plant will begin operations. Overall looks a great story is unfolding.

Disclaimer: Invested from 500 levels

Surprisingly…have been looking at this counter but could not take position because of few apprehensions. Depicting my two cents.

  • The management off lately became pretty active in terms of advertising new order flows news in the market resulting in sudden spurt in the stock price which later cool off

  • Was expecting a better 2QFY18 performance given the company achieved highest ever production during August and September. But the performance was muted and raise my apprehensions further high.

  • Today again the stock shot up by 10% driven by news flow from Management about a prospective big long term order flow for Chennai Plant which will have sizeable impact on bottomline - HOW MUCH, no answer.

  • For a Rs 1900 crore market cap company and with revenue of Rs 1330 crore and PAT of Rs 70 crore, the CFO on paper earns barely Rs 30 lakhs including ESOPS (as per FY17 annual report). Interestingly the company secretary also earns Rs 25 lakhs. ARE YOU SERIOUS. In a cut throat competitive market why the CFO, an old timer with the company stick barely for Rs 30 lakhs.

Disclosure: Not invested because many such apprehensions.