Banco Products - Auto Ancillary Play with a bang

Stock Opportunities
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Banco Products India Ltd has historically been viewed as a conservative player in the auto ancillary sector, primarily known for its radiator business. This perception has been characterized by:

1) Modest growth trajectory in a mature industry
2) Limited product diversification, with a focus on radiators only
3) Perceived weak negotiating position with Original Equipment Manufacturers (OEMs)
4) Past investments in seemingly unrelated sectors like chemicals and cement, raising questions about capital allocation strategies

However, this characterization may not fully capture the company’s evolving business model and recent strategic initiatives. Banco has been actively expanding its product portfolio, investing in research and development, and exploring new market opportunities, particularly in the electric vehicle and alternative energy sectors. These efforts suggest a more dynamic and forward-looking approach to business growth and diversification leading to Banco Products India which has moved beyond radiator only company and serving non-auto industries too.

I would request everyone to read the entire thread. By reading posts from 2013 till today – one will truly appreciate how far the businesses has evolved and how market treated Banco perceived with no growth potential and EV migration threat to kill radiator as an auto product. @hitesh2710 bhai has covered Banco’s business description very well in his Feb, Mar 2014 posts.

Banco Products’ strategic acquisition (for 17.7mn Euro against net current assets of 24.8 million Euro) of Nederlandse Radiateuren Fabriek (NRF) in 2010 has emerged as a transformative move, positioning the company as a significant player in the European automotive components market, cooling solutions and heat exchanger manufacturer. Key highlights include:

  1. Strategic European Footprint
    • Three manufacturing units across Europe
    • 11 warehousing and distribution locations
    • Presence in over 80 countries
    • Extensive product portfolio with 10,000+ Stock Keeping Units (SKUs)

  2. Market Expansion & After-market EV Products Offerings
    • NRF has become a leading manufacturer of automotive, industrial, railway, and marine cooling systems
    • Provides Banco with a technological edge and faster market entry in European markets
    • Contributes significantly to the company’s export-driven growth strategy
    • As a leading manufacturer and supplier of automotive aftermarket parts, NRF offers a wide range of cooling products and solutions that are compatible with various vehicle brands, including Tesla. https://nrfinnovationrange.eu/

  3. Performance Metrics
    • Contributed to Banco’s revenue growth of 21.43% CAGR over five years
    • Helped improve the company’s operating margins to 15% in fiscal 2024 from 10% in fiscal 2019.
    • Enables Banco to diversify beyond its traditional Indian market
    • The NRF acquisition has effectively transformed Banco from a regional auto-ancillary player to a global cooling systems and heat exchanger manufacturer with a robust international presence.

Let’s zoom-in and look at how the European Subsidiaries are performing and are playing a crucial role in this transformative consolidated numbers for the parent company Banco Products India:

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  • Banco’s true transformation begun after selling off Lake Minerals Mauritius Limited (LMML) and Kilimanjaro Biochem Limited (KBL). The company planned to exit from these unrelated businesses by selling its stake to Agro Scientific Investments Limited (ASIL), Mauritius. The transaction was expected to be completed on or before April 2019.

  • Both Standalone and Subsidiaries (mainly European NRF subsidiaries) were doing topline of about Rs. 450cr in 2013. Standalone grew to Rs. 1011cr and Subsidiaries to Rs. 1709cr by FY2024.

  • Domestic Standalone business has grown exceptionally from FY2022 while European business has flourished from FY2019 till 2024.

  • Both India and European businesses are clocking about 18% very impressive EBITDA margin.

  • Europe business is operating at a very healthy >25% ROCE while maintaining strong operational growth.

Below links will help better understand the European business:

Summarizing the Bullish Viewpoints:

  • It seems like NRF has transformed from a single radiator company to dynamic and innovative auto solutions company post getting acquired by Banco in 2010. 2010-2018 were years of toil and the positive results are beginning to be seen post Covid.

  • By being early movers to directly train the technicians on EV cars – it is able to create a win-win relationship and being able to push their after-market EV parts especially for a car like Tesla and Polestar.

  • It has significant presence in Europe with 3 manufacturing units and 11 distribution locations expanded to over 80 countries with 10,000+ SKUs

  • Absolutely no dilution done by the management to achieve the growth and diversification through European operations and successfully creating a niche business.

  • Domestic business is a debt free, efficiently run business. Its currently on a growth path helping management grow its topline from 650cr in 2021 to 1037 TTM as of 10th Jan 2025.

  • Banco and NRF’s main product; radiator and condenser is not going anywhere because of EV. EVs need radiators as much as ICE cars. Below links will help understand why radiators are must for an EV car:
    o https://www.youtube.com/watch?v=rEK5euR8eeM&list=WL&index=2
    o https://www.youtube.com/watch?v=gjNuZ0ZM4PI&list=WL&index=3
    o https://www.youtube.com/watch?v=DxEnBunySj4&list=WL&index=4

  • Valuation seems to be comfortable along with 2.11% dividend yield.

Summarizing the Bearish Viewpoints & Risks:

Disc: invested and biased

PS: In next post I will share why Poland’s automotive aftermarket is a possible game-changer for NRF, and how NRF is strategically positioning itself to capitalize on this dynamic landscape. Also why NRF’s EV training studios are helping them to be “at the right place at right time”.

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87

Thanks Amit for sharing such an insightful post on the company.

I was looking at the growth in France and Netherland market and that has not been in line with the growth in EVs. Sharing the charts below

Netherland EV Sales
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France EV Sales
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Does this mean that the company is stronger in Polish market than the others?

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NRF opens new 18,613 m2 warehouse in Romania

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Banco reported very disappointing quarterly consolidated results. EBITDA margins completely collapsed.

Since Banco’s management doesn’t conduct quarterly con-calls, investors would have no clue about the “actual” reason behind sudden drop in EBITDA margins. Imho, it would be irrational to continue to hold hoping that margins would recover along with stock price.

I decided to take it as a learning experience and get out by paying a small tuition fee. Happy to come back to it if and when management conducts concall or if I have some scuttlebutt information which has merit to enter again.

This post doesn’t add any value but wanted to share it here since I have gotten a lot of personal messages on VP asking about my views on Banco’s quarterly results. I won’t be able to reply to all the messages but hoping that you get my response from here and also for others.

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Refer notes no. 5 in consolidated results, it says they have 34.8 loss due to Forex flactuation. That may be reason for drop in profit.

Extract:
“5.The consolidated profit before tax of Rs. 3,894/- J,akhs for the quarter ended on 31.12.2024 includes inter-alia translation loss of Rs.
3,483/- Lakhs on account of foreign exchange fluctuations on inventories of overseas subsidiaries as against translation gain of Rs. 2,700
Lakhs previous quarter ended on 30.C.'9.2024.(1’ranslations loss or gain arises on converting the Inventory of overseas subsidiaries in
INR at closing Exchange rate of each period )”

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Q4 results of Banco.
Much improved numbers just like Q2 FY 25 after a lumpy Q3 FY 25. Very high level of volatility and lumpiness in numbers after Q2 results was highlighted on this thread by other participants. However, results of all 04 quarters of FY 25 were affected by some one time or extraordinary non operational expenses/gains. This includes deferred tax in Q1 and forex gains/losses in rest of the 3 quarters. The information related to forex gain/losses is part of the notes provided after the P&L statement. I am not sure if this is a right way of reporting such things. Probably this should have been part of extraordinary income/loss.

If we write down the PBT numbers after adjusting for these things than the numbers look like this:-
Q1 FY 25 - 109 crores
Q2 FY 25 - 170 crore
Q3 FY 25 - 74 crores
Q4 FY 25 - 150 crores

Companies numbers have some element of seasonality and thier Q3 have always been the leanest quarter in all of the previous 3 years. Company incurred some capex by adding a production line and a warehouse at thier Poland subsidiary, which led to higher depreciation in the Q4 numbers. Otherwise, Q4 numbers would have been similar to Q2 numbers.

Probably the numbers are not so volatile as they look like at the first glance. At yearly level sales numbers have grown by 16% and PBT (adjusting for forex gain/loss) have grown by 38%. In fact such type of growth is sustained from last 3 years.

Valuations: FY 25 full year sales is 3212 crores. Adjusted PBT is around 502 crores. Applying 26% tax rate, adjusted PAT comes around 370 crores. At CMP it is trading at 16 times FY 25 earnings. These multiples dosent look expensive for a company which is growing Sales at 20% and Net profits at 30% from last 3 years.

Negatives: There has been substantial increase in working capital (inventories + receivables) which led to increase in short term borrowings from 186 crores to 293 crores. Basically cash flow generation has been quite poor this year at 30% compared to almost 100% in the previous year. This needs to be tracked closely in next few quarters.

The intention of this post was only to understand the numbers. Understanding behind the actual business was covered very nicely by @rupaniamit in much detail some time back.

Disclosure: Sold after Q3 FY 25 results. Planning to re enter.

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Median pe of 101 auto anciliary companis is 27…compare to Banco pe is 15…
(Screener)

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  • Company has delivered good profit growth of 39.9% CAGR over last 5 years
  • 3 Years ROE 28.3%Don’t know why market giving Banco such a low pe…
    Hope..pe rerating with growth give good return henceforth…

New CFO may address your accounting concern…

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Sharing few notes as this company came on my radar recently…all numbers below are approximations of data from screener and I have assumed most of Other assets and Other Liabilities are making up Working Capital. I’m not invested in this company yet.

In the last 4 years (FY21-25), incremental ~₹300 crores of Fixed assets & ~₹700 crores of additional Working Capital on the B/S have been financed by ₹500 crores in Equity & ₹500 crores in debt.

Looks like company leveraged itself over the last 4 years to fund Fixed and Working Capital which is not a good decision given we were in a rate hike cycle since 2022.

But it looks like mgmt offset that impact with a very high sales growth CAGR & increasing Operating margin; sales have gone ~2x from 1500 crores in FY21 to ₹3200 crores in FY25 implying a sales CAGR of 21% pa in last 4 years.
Operating margin has gone from 12% to 19% in the same period.

RoE has been increasing too (28% average in last 3 years vs 33% in FY25). Looking at the breakdown of ROE in terms of Net Profit margin, Asset turnover and Leverage,
NPM has increased from 7.4% to 12.2% between FY21-25;
Asset turnover has decreased from 1.3X to 1.1x
Leverage has increased from 1.43x to 2.2x.

Cash flow generation has been poor in the same period. Operating Profits have increased from ₹118 crores to ₹600+ crores in last 4 years but CFO is almost same at around ₹160 crores. Which means a lot of sales growth has not translated to cash flow. This is also clear from their rising inventory/receivables. (Is this why they didn’t declare final dividend recently?). FY24 was an exception where Operating cash flow generation was quite good.

Stock has risen by 6x in the same period (from ~₹70 to ₹400+ now) which is higher than Earnings growth of 3.4x. Compared to historical media PE of 10, stock is currently trading at 16x which is high.

Promoter holding is stable with no pledging of stake and FIIs have been increasing holdings.

Overall, growth metrics, ROEs and margins look good and high + stable promoter stake gives comfort. While high valuations compared to historicals & poor cash flow generation are a concern.

Yet to look into products of the company and competitive intensity so would appreciate if someone can guide on that front. It is possible current set of financials indicate some kind of a top in the cycle!

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I have had same concerns with the spike in its inventories and receivables. Though am not reading much into no final dividend. If I go into the history, it has consistently paid Rs. 20 to 22 (pre-bonus) per year in dividend. Sometimes it has done it as a single tranche - be it interim or final and at other times it has splitted between an interim and a final.

We don’t get much visibility about how the company makes money because the management hasn’t been doing con-calls and the annual reports don’t reveal much either. But one thing that they have been mentioning is that theirs is a very projectized, bespoke business model. So that makes me wonder - could it be that the inventories and receivables spike that we see are a function of WIP as on the quarter end that also coincides with the financial year end and they get converted into cash during say Q3 quarter and hence the dividends are timed with Q3 results?

Just some thoughts from an amateur trying to make sense of the numbers.

Disc: I have been invested on this stock since 2020, partly exited at around pre-bonus 1100. Still holding another half of original holding not wanting to miss out of the growth the business seems to promise and yet, being very cautious about the lack of information especially concerning the cash flows.

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