Entry and Exit in ICIL
In last month, added ICIL and even sold it.
The reason why I added ICIL was that it was a market leader in home textiles with growth when compared to Welspun.
Textiles are gaining market share from China and Bangladesh.
Cotton prices are dropping so there would be margin expansion.
I bought it before the result and sold it before the quarterly result.
I bought it near to 360 and sold it at nearly 380.
I made it 3 percent of the portfolio as it was a cyclical industry instead of the usual minimum 4-5% allocation.
The reason behind selling as it went to 450 and came back to nearly 380 and I could not find the below reasons.
- I could not explain to myself why India is gaining market share from Bangladesh and China.
- I could not explain to myself the triggers behind the management guidance.
Entry in Sandhar Technologies Limited
Industry structure -
- There has been an upturn in 2W and passenger vehicles which is quite evident now. Especially TVS and Bajaj are growing better than the competitors. Currently 30% revenue contribution from TVS and 19% from Hero as per Q3FY24 for Sandhar.
- More job creation due to budget, 2 wheeler and 4 wheeler sales increasing again.
- Good monsoon this year
- Increasing profits as capex will slow down and new plants will mature.
- Market leader in locks and mirrors
- Sandhar’s business outperforms their client’s revenue growth. In downcycles, their degrowth is not as bad as their clients. (Link → Sandhar Technologies - An emerging market leader).
- 300 Cr Operating cash flow when compared to 3800 Cr valuation
- Increasing ROCE from 8% to now 12%
- Management tries to attain the asset turnover ratio of 3 and it takes 2-3 years normally to attain it.(Q4FY24)
PE expansion
Not possible
Operating leverage
Yes as capex will slow down and new plants will mature. Already playing out.
Increasing revenue
Due to the shift from manual to smart locks.
Large scale launch for smart locks in october in honda and suziki
PV and 2W growth and this company is EV agnostic.
Tailwinds
New smart locks(Min 5x revenue when compared to manual locks) and large scale launch in Oct-Nov this year(Near to mid term)
Operating leverage for at least 2 years as the company can increase the revenue up to 50% without during any capex - Q4FY24 (Near term)
2W and PV growth (Near-term)
Deleveraging increase in profits as hinted by management(Least priority for management for now - https://www.youtube.com/watch?v=LTSwUsNFr1Y) - (Long-term)
Negatives
-
Low margin(near to 10%) means dependent upon the customer
-
Maybe have paid a little higher.
Exit criteria
- New smart lock adoption fails
- Check for Hero and TVS sales regrowth
Vstop
Postitve
Stage analysis
Stage 2
Moat
Make plants near clients and hence if new player needs to come, they needs to invest substantially to setup plant nearby
Patent in smart locks till 2038(Need to understand completely)
Market leader in locks (Need to look more into why its smart locks business can not be disrupted)
Optionatility
Entry in EV space.
Notes
Max the margin can expand to 12.5%(https://www.youtube.com/watch?v=LTSwUsNFr1Y)
Guidance - FY25 growth same as FY24
I have been tracking the Sandhar from 2023 but could not get the reason why I need to invest in it. Now I understand it, it is due to product mix change(due to smart locks), operating leverage, and growth in vehicle sales. Even if one trigger fails, other strong triggers can provide growth on their own.
I like to get into a company with long growth years, I feel that maybe smart locks can provide it but the competition risks in smart locks need to be analyzed and its success needs to be tracked.
Need to also understand whether the 2W growth will be sustained for 3-5 years if somehow smart locks fail to perform.
I paid a PE of 35 and I feel it is high but if it can grow more than 30% for a few years then it may be a bargain. Due to operating leverage, the company profits will grow 1.5 times the revenue growth.
Hence 30% growth in profits is on the cards as most of the auto ancillary companies grow near to 6% better than auto companies and Sandhar has been an outlier recently with more than double of 2W sales growth(normalised sales growth of TVS and Hero).(Sandhar Technologies - An emerging market leader)
Need to find the reason why the auto ancillary companies grow better than the auto companies.