Banco Products

Stock Opportunities
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Hi , learning
Though your query is addressed to Hitesh Sir but sharing my views ! Tried to answer few things. May or may not be useful to you.

It is more a Value Buy then a Growth Buy at present. The company accelerated product development initiatives and has added new products for OEM, Replacement and Exports markets during last 2 years which in my opinion has aided growth.

The company deals in Aluminium Radiators and Copper Brass Radiators.

Aluminium radiators finds application in the CV and the tractor segments and are preferable to copper-brass radiators due to their economical weight and cooling properties. The growth in aluminium radiator sales has been supported by the healthy demand prospects from the CV segment as well as tractor division. This contributes around 80% of the Revenue. Major Clients are : Commercial Vehicle : Mahindra & Mahindra , TATA Motors , Ashok Leyland
Tractors Vehicles : TAFE, John Deere, International Tractor , M&M , Escorts

Copper-brass radiators are employed by the railways and for industrial applications where heat dissipation requirements are higher.
Clients : Cummins, JCB , Kirloskar , Indian Railways

The copper-brass radiator segment had been facing headwinds till FY 2015 due to a dried up order book and the inability of the company to maintain competitive selling rates but it resurged in FY 2016 with the company receiving a healthy inflow of orders from the Indian Railways starting FY 2016. This may well be the another reason for growth in Sales in Last few Years. Though it forms just around 20% of Revenues.

The Indian industry is preparing itself to abide to the global level of emission norms by 2020 (BS VI for CV, BS IV for Construction machinery and BS VI for 2 Wheelers). Good prospects for the company to tap the opportunity and develop new generation engine cooling modules suitable for the emerging emission standards. I believe they have the required technology and it may well benefit in the Medium Term.
Also with growing government spend on infrastructure , demand of products in industrial sectors such as earth moving and construction machinery , power generation equipment , Railways is also looking Good.

Banco’s end user base is well diversified which makes it less prone to being dependent on a single industry. While the major demand comes from the auto industry (CV segment), It also caters to industrial and earth moving equipment, rail locomotives along with agricultural equipment industry.
No doubt , any downward trend in Industrial activity or Automotive Sector will directly affects the performance of the company.

High bargaining power of OEMs restrict margin expansion. Though it maintains OPM Margins around 12-14% Level except one Years when Raw Material (Metals) Prices have risen significantly. Currently the Metal Prices have cooled off significantly and I believe company wouldbe able to maintain OPM Margins around 14-15%.

That was a issue but sorted now. Company is going to divest that business and it will help in more concentration on the main business.

I do not know about the declines of exports but if it is , I find it very good. The Standalone numbers which are mostly for Domestic business are pretty good on Margins front. The Netherland Subsidiary has suffered some headwinds due to uncertainty in Europe and has overall impacted the Margins on a Consolidated Basis.

Overall it looks a good buy at Current prices both on Value term as well as Growth prospects. Threats from EV looks far away and company is looking to find suitable products for EV Segment. Need to get more details from Management about Current Order Books.

Disc: Invested

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45

Thanks all for the write up. Wanted one clarification - the operating margins of the company (EBITDA - Other Income) has been quite volatile which is unlike the nature of business they operate in. Most of the auto ancillaries in India operate with a Cost PLUS markup basis.

Standalone OPMs:
June 2016 Qtr: 22%
Sep 2016 Qtr: 20%
Dec 2017 Qtr: 17%
Mar 2017Qtr: 14%
June 2017 Qtr: 13%
Sep 2017 Qtr: 17%…
June 2018 Qtr: 15%
Sep 2018 Qtr: 13%

Annualized:
FY10: 26%
FY11: 20%
FY12: 15%
FY13: 15%
FY16: 19%
FY17: 18%
FY18 15%

I was unable to understand the reason for this volatility in the standalone business as this industry in India mostly operates on a cost plus basis.

Disc: Not Invested but Interested!

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Source of the Information is Screener.com

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Hi Navneet, how do you say that most auto ancillaries work on cost plus markup basis? any source pls?
i feel they would be subjected to intense negotiations from the auto companies (2w/4w) they supply to due to increased bargaining power of buyer. Limited 2/4W companies in India…specially during challenging times like these…

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Hi Mayank,
You could check the Gross margins / EBITDA margins of various Maruti, Hero, other 4W ancillaries like Jay Bharat Maruti, Motherson Sumi (standalone), Munjal, Sandhar, Sharda entities etc… these companies procure various commodities like steel, copper, aluminum and the sell price to the OEM is a function of the commodity price. The fact that their operations are JIT also helps them to negate the commodity risk to quite an extent. Most of the ancillaries that I have met have a pass on of the Fx rates as well. So USD / INR depreciating (only on RM imports) is also passed on in India. the Fx risk and the Ctdy risk is completely taken by the OEM. That is perhaps the reason why these ancillaries invest significantly in building up capacities while their EBITDA margins are not very high (coz the business risk is also limited). Abroad i think the contracts are fixed price contracts where the ancillaries take the ctdy risk

Meanwhile, Banco’s results from Q3 saw a substantial decline in EBITDA margins to ~4.4% (consol) - although the company has continued a strong dividend payout of INR 5/-.

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49

@hitesh2710

I have the following questions,
1)I read from the above messages that the banco products is passing through the dividends it is receiving from its subsidiary? is that from lake minerals? if that is the case, as they are going to sell their complete stake from the successfully running business, in future we may not get higher dividends(Rs 10 per year)
2) Any body have any insights about their new products especially for Electric vehicles as the globe is moving towards Electric(mostly developed countries where they have customers), Any of their existing products can be used for Electric vehicles?
3)Though we knew that the company is good WRT Quality products, 75% promoter holding, higher dividends, what will be the push or trigger point for massive growth for example anything which will make this company to grow fast from these levels

Whether its still attractive at this price?

May be everyone might be having these questions in mind, it will be good if you clarify the same

Thanks in advance

Disc:Invested, Planning to hold for long term

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@marunachalam11

!. About the dividends, I attended the AGM and suggested buyback as a more efficient mode of improving shareholder returns. But was told that since they received the dividends from subsidiaries passing through of dividends made more sense for them. (No idea how pass through dividends are taxed for the company). How much dividend is received from which subsidiary is not known.

  1. About EV, in my AGM write up I had written, EV cooling systems is something which company is looking out for though not much work seems to have been done. Besides this no further details available.

  2. I cannot see massive growth for the company unless something changes drastically for them. This was always a value buy for me based on dividend yield based downside protection but that thesis is also now being tested.

The standalone numbers and operating profits have been very good. The higher tax for standalone results has dampened the net profit figures.

Consolidated numbers are a howler and I cannot figure out which subsidiary is affecting the company to such an extent. My guess would be NRF Netherlands. Or maybe Lake Minerals which technically is still a subsidiary till the whole process of sale is completed.

One thing to note here is that the company is like a black box. No answers except at the AGM. They dont meet any analysts or retail investors.

Whether its still attractive at this price is a question an investor has to answer himself. My answer may be different from others’.

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51

I do not see anything wrong with the results. I was expecting such results though a little better as Metal Prices went down during the quarter. May be we will see the lower raw material prices effect in next quarter.

December Quarter has always been below average for the company. Possible reason may be due to the Subsidiary NRF Netherland where i feel they have to adjust some numbers as the accounting year is probably Jan-December there. Nothing could be said with surety but that has been the trend.

If one looks at the December 2016 , the OPM Levels were around 6.3% . The higher profitability during this quarter was due to higher other income as well as lower Taxes.

If one looks at December 2017 , the OPM Levels were around 8.7% . Again the higher profitability was due to Negative Income Taxes (Deferred Taxes).

Now , as we look into December 2018 , the OPM Levels have fallen to 4.4% due to higher material cost. Negative Profits are due to extremely high Taxes. Hard to find any reason for such. Profits from these subsidiary is shown as profits in Discontinuing operations which is a positive figure so the losses are mainly due to NRF which is facing some headwinds but again December quarter always remain tepid.

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On a TTM Basis , things do not look that bad. The profitability numbers have always been tough to guess due to varying Tax Rates. Also , the fluctuations in OPM levels indicate poor pricing power of the company and inability to pass on the higher raw material costs. High bargaining power of OEMs restrict margin expansion. Also any downward trend in Industrial activity or Automotive Sector will directly affects the performance of the company. We have seen downfall in auto Sector in current times and thus the effect was bound to show in Banco Performance.
Also as Hitesh Sir pointed that the company does not meet with analysts and we can know more details about the performance in AGMs only , it becomes tough to guess what actually affected the performance on quarterly basis.

Disc: Invested , have done some additional purchases today.

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Hitesh Sir, what about the inventory levels, even in the last annual report they reported increased inventories from 95cr to 135cr on a net block of 191Cr. Not sure if we can gather similar information from the quarterly reports… Do you think this is a concern here… thanks

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Thanks for the wonderful posts @hitesh2710 and @bharat19!

Having a few questions to understand further.

  1. What is the definition of “time to market” in this industry?
  2. Any idea who owns “Agro Scientific Investments”? Seems this was started just in September 2018 as per below link, while Banco’s subsidiaries were bought in October 2018. Did someone setup the investment company just for the purpose of buying Banco’s subsidiaries? Does that sound fishy or is it a common practice?
    https://opencorporates.com/companies/mu/C158779
  3. From Hitesh’s AGM write-up, I understand that the BS VI vehicles would need more cooling products per product. Is there any way to verify this from external source. Can someone working in the auto industry help please?
  4. Bharat, do you mind sharing your source for information that 80% revenue comes from Automobile segment? I see latest credit report says 50% comes from Auto, however I too feel it would be around 70%-80%. Just curious on what is your source.
  5. This one is a question for the future. Though the company is trying to venture into EV Cooling systems ove time, it is important to understand if EV Cooling market would be of same size i.e. cooling systems for EVs may need not be advanced implying a shrinking market for Banco.

Discl: No holdings. Not a buy / sell recommendation. Not a SEBI Registered Analyst

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It is a promoter Group Company (Refer Disclosure of Sale) registered in Mauritius. Looks like incorporated in 2018. Can not say about the reasons of incorporation but the Sales of Banco Subsidiaries to other promoter entity looks to be done at fair price. Cost of investments as per the Books for these entities was around 17 Cr (Invested in around 2012) while it will receive around 46 Cr on Sale of the subsidiaries. Moreover those subsidiaries formed 4% of overall revenues so not a significant amount and thus have not got much in deep. They had done lot of unnecessary Diversification in past but looks like correcting those now. They have not diluted equity as well as are generous to pay dividends so nothing wrong i have found about the promoters.

Quite tough to say exact but looks like company focus on this aspect.
banco

Source: AR 17-18 , Page 8

Banco%20%203
Source: AR , 2017-18 , Page 15

Aluminium Radiators due to its light weight are used for Automobiles while copper Brass are used in Non-Auto Vehicles. I looked in AR 2017-18 for contribution of Aluminium Radiators which is around 80% and that was my interpretation for 80% sales from Auto.

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Source: AR 17-18 , Page 23

It is quite tough to say as of now as Banco shares very limited information. Annual Report too is of not much use. But EV looks a little far from here. Management too would be looking towards it.

Banco%202

Below is the Alkraft (Banco’s Competitor) Management view on BS-6 and EVs !

Disc: This looks more of a Value Buy to me than a growth. Current downturn in Auto Sector may affect the performance. Once Auto sector revives , Possibility of PE expansion as well as little growth may provide a 15-20% kind returns for next 3-5 Years. Does not look a great business but certainly looks good at current prices. Invested for a medium term with half yearly monitoring.

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Looks like not much discussion about the Banco subsidiary NRF here ( though it appears to have dented the margins). NRF name comes from Nederlandse Radiateuren Fabroiek ( NETHERLANDS RADIATOR FACTORY). NRF seems to have an extensive solutions for cooling requirements. Since its a 90 years old company they have spare parts for nearly all ( including old) cars/models. I have given their website below which takes you to the word of coolers.

They have three main categories. Marine, Industry and automotive. NRF marine division and recently delivered box coolers.

They also have air conditioning products. I checked with my friends at Netherlands and they say its a good company to work with and people are professional and helpful.

Looks like NRF is technically advanced, and they can easily develop new products, according to the market demands. They also have good distribution network across Europe and ware houses in different countries. Banco acquired NRF in 2010 since then it contributed well. The yearly profits are between 4-5 mil $ every year. I think Banco uses NRF as technology front and easy access to Europe.

Coming back to the Banco, what is worrying is the divergence between consolidated and stand alone business. In the last four quarters cumulative consolidated profits are less than stand alone profits by 35 Crores. I really don’t know which subsidiary caused theses, as we do not have the individual subsidiary P&L at hand. I looked into available AR’s of Banco Gasket, NRF and lake minerals, but couldn’t figure out which one could be causing losses. Its also possible that they were writing off some assets in Lake Minerals and Biochem company before selling ( only a guess, no data at hand). But now company only has core business ( Banco Gasket and NRF being only subsidiary) and sold all di worsifications.

I am holding Banco ( though not added recently) about 4 % of my PF mainly for the Div. Yield. and good downside production.

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Can we not get the financials of all subsidiaries from the company? They are regulatorily required to share these with the shareholders if demanded, even if they dont publish it on their website.

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You can get the Annual reports/financials of the subsidiaries here

http://www.bancoindia.com/investor-relations/#1496920183159-ffea24ee-ddc9

FY19 AR is not out yet…

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Hi Bharat, did you chnage your stance post the latest quiarterly numbers?
Inventory levels rising was one concern i had… Stock has fallen more than 30% over the last few months…
Thanks, Mayank

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Yes i still hold the shares but one important learning was that the Dividend yield Downside Protection is not a healthy metric to decide for investment. Banco being a ICE player have less relevancy in EV world as of now as i do not think they have any lead product for EV. But in my view , EV in India looks a little far and at the entry time , the valuations looked comfortable with good dividend yield.
As wrote earlier , it is not a great business but it looked good at those prices. Even looks very attractive at today’s price.
Current fall may be due to the poor Auto Cycle as well as carnage in Small Cap /Mid Cap space. I do not see any negative on the company front. Will look for the Annual Report for more insights.

Disc: Invested

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Did anyone attend the AGM? Stock seems to reacting very strongly post AGM.

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the material is good to to study if one hold the banco stock s and want to know how cooling will roll out in the phase of E.V

This below mentioned article is old and ruled out the possibility of any cooling system but some parts and information is good

and below is the article how the air conditioning system in an electric car works

disc : it is in my watch list This is not any recommendation to buy sell or hold

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