DISA INDIA LTD- opportunity on capex cycle revival

[narendra]

CMP: 6000.00
Market cap: 869 Cr.
Disa India Limited(DIL) supplies moulding machines, sand mixers and surface preparation machines to foundries or OEM with foundry division to make metal casting.

Little introduction about foundry/casting:
Foundry are facilities which produces metal castings and offer casting related services. Metal is melted to liquid state and poured into mould of desired shape, mould material or casting is removed after the metal solidifies on cooling. These casting will have certain impurities/rough surface which has to be removed and smoothened by shotblasting.
Most common metals which undergo casting are iron and aluminium. Other materials include steel,bronze, zinc and magnesium. Watching the video from the recent movie Avengers-infinity, the scene of hammer making by Thor may help us understand it better Stormbreaker Making Scene | HD | Groot Helps Thor to make stormbreaker | Avengers: Infinity War 【HD】 - YouTube

Foundry is considered as mother of all industries. Approximately 90% of all manufactured goods depend on metal castings for component parts, with cars and trucks being the largest market. Castings are used virtually everywhere including household appliances which are used in daily life like cookers,plates,cups…etc. In the order of preferences, casting are used mainly in automobiles(32%), agriculture equipment, earth moving equipments, aerospace, railways, shipping, heavy equipment, mining, defence equipments, pumps, compressors…etc

DISA INDIA mainly caters to ferrous casting industries which are used in heavy commercial vehicles and tractors by providing complete foundry machines and solutions.
Wheelabrator division provides shot blasting machines for surface cleaning of castings produced at foundry.

DIL is an Indian arm of Denmark-based promoter company DISA HOLDINGS which owns 74.8% stake and in turn operates under the umbrella of NORICAN group. NORICAN group formed by Disa ltd, Wheelabrator, Italpresse Gauss and Striko Westofen.The following images gives overview of the Norican group.

Disa India ltd(DIL) is a leading equipment manufacturer with advanced foundry and surface preparation technology. It supplies complete foundry system by integrating international range of moulding machines and sand mixers with proper combination of sand plant equipment.

Investment thesis:

Changes in Indian foundry industry:
Around 4,000 to 5,000 foundries are present in India with estimated capacity of 13 million ton capacity. The no. of foundries have reduced from around 6,000 to present no. due to bad economic condition in last few years. The total production of casting for last few yrs is :
2015-16: 9.8 million tons
2016-17: 10.3 MT
2017-18 : estimated around 11MT
With capacity utilisation of foundries going up, they need to expand for further growth which should benefit the market leader DIL.

Automation and manpower reduction: Indian foundries are facing problem with lack of skilled manpower and increasing labour cost. Disa offers complete automatic solutions to foundry industry which requires minimal manpower supply,reducing manpower cost and improves productivity. Currently out of 5,000 foundries, only around 300 are automated which gives DIL good opportunity.
Disa India growth is directly linked to growth of manufacturing industry and capacity expansion by various sectors like auto, agri, infra, engineering goods. Around 32% of foundry industries output goes to auto sector. After reaching peak sales in 2011-12, auto industry has suffered for next few years with slow economic development which in turn had adverse effect on foundry growth. Now with record sales of auto /tractors in FY18, foundry industry should be looking for further capacity expansion. This should automatically benefit Disa India. If we track the order book for last two years it is getting better with each quarter.
order book(in Cr) Q1 Q2 Q3 Q4
FY17 87 92 53 70
FY18 113 118 91 126
FY19 155

DIL as global supplier to Group companies: due to low cost of manufacturing at India, parent company considers DIL as manufacturing hub for its global supply. In the year 2016-17, it has passed resolution to increase transaction limit with other group companies for expected increase in exports from DIL.
Disa Industries A/s(Denmark) - 75cr
Disa Changzhou(China)- 20 cr
Wheelabrator Czech( Czechoslovakia)-20 Cr

Wheelabrator merging with DIL: In 2009, DISA group merged with Wheelabrator group which is leader in manufacturing of shot blasting machines. As a result of global merger, wheelabrator products are represented in India exclusively by Disa India ltd. Wheelabrator technology has been localized for production in India and marketed under wheelabrator brand by DIL.

Bhadra cast alloys: DIL acquired a local foundry in 2016 and renamed as Bhadra castalloy to supply casting to wheelabrator products and for global supply which has started contributing to growth. For fy18 it has net revenue of 9.8 cr and net profit of 0.4cr.

Filters: Filters contributes to around 15% of revenue. DIL is selling these products with foundry machines and as stand alone products. With strict environmental norms the use of filters is expected to improve.

Norican has acquired light metal casting solutions(LMCS)group in 2017 which is an equipment manufacturer and service provider for light metal casting alloys of aluminium, manganese and zinc alloys. This acquisition is contrast to present Disa focus on grey iron casting(ferrous segment). LMCS provides new opportunities for group in nonferrous segment. How this is going to benefit DIL needs to be watched.

Being in cyclical industry it has managed headwinds of economic downturn very well in last ten years by reporting positive net profit and remaining cash rich( 75Cr) which is the hallmark of quality company with good management in challenging business scenario.

Negatives:
Cyclical business:DIL depends heavily on foundry industry, manufacturing heavy casting for HCV and tractors. With economic downturns business may suffer.
Increase in raw material cost: with increase in Iron ore price, the offtake from foundries will reduce as the end customer will not easily accepts price increase. In January/ February of this year there are certain reports that how the utilisation of foundry industry went down with spike in iron ore prices.
Environmental issue: as most of foundries release poisonous gases, the Govt may impose certain restrictions which can further dampen the growth of foundry industry (it may turnout to be an opportunity for DIL)
Company doesn’t have much space to expand at the existing factory sites. It may have spend more on land /new factory when it takes up expansion.
China import effect on foundry industry: around 1-2 lac of casting is imported from China which in increasing every year. It’s difficult for Indian foundries to compete with China as govt provides 40% subsidiary.
I think the focus was shifted more to India as ex. MD Viraj Naidu moved up to global position in the group company. If he decides to quit, Will the parent company remains bullish on DIL needs to be seen.
Equity base of company is small and illiquid.

Discl: invested around 9% of Portfolio.

[narendra]

Notes from AGM based on interaction with Ex.MD Viraj Naidu and Lokesh saxena (MD).I could interact with one employee also during AGM which was quite helpful.
( There may be few mistakes from my side while noting down the points discussed)

Foundry industry- present situation and outlook: 4000 to 5000 foundries are presently opearating in India. With ongoing consolidation 1500 to 2000 foundries may remain. Presently 200 to 300 foundries are automated. This 200 to 300 are doing almost 80% of total foundry business. More than 100 lines are mechanised high pressure moulding lines primarily done by Disa. Disa market share is around 60%.
competitors in moulding business are kukai?.(.Europe), Japanese company citer Tokyo? for wheelabrator local competition and ?japanese company.( couldn’t recall the names properly).

DIL products/advantages and automation of foundries: Disa India has vertical and horizontal moulding machines(eg: IFLEX and ARPA horizontal). Horizontal machines which are traditionally used in India requires more manpower ,side pellets? ,jackets(not sure about these technical terms) and more cooling time. With vertical moulding no need of side jackets,pellets and less cooling time as well. Current trend is towards vertical moulding machines. The type of moulding to be used depends on casting. In general speed of vertical casting is double of horizontal . If customer wants more production, vertical moulding is ideal as long as technical side allows it, but it’s not always possible with certain castings. The quality and yield is better with vertical moulding. It has to run through continuously otherwise it will be loss for foundry. We are into automatic solutions only. We had/have semi automatic product called arpa but market is not choosing that any more.

Our machines run on very high speed automation production process. Don’t think that all the 4,000 foundries gets automated. Currently 6 to 8% are automated. Our automated products mainly benefits owner with less manpower requirement. Till now we were seeing brownfield expansion in foundries but greenfield expansion has started.Presence of thousands of smaller foundries is an opportunity for us to sell more. Smaller ones are getting smaller. Not easy to raise the selling price depends on customer. Aftermarket demand for spare parts/servicing has gone up due to high utilisation level of foundries.

We have most of the machine customised as per local foundry requirement. No two machines are alike. We can demonstrate the foundry owner about cost saving /more productivity /quality with DISA machines compared to existing ones. Our cost may be higher to competitors but it will benefit to customers.Capital equipment like foundry machinery are sold on technologies and returns it offers to owners. Our cost may be high but it helps in saving and increasing productivity It will increase the productivity.If the foundry owner doesn’t want to increase his productivity/revenue we can’t help much. End customers are demanding good quality casting from foundries (e.g: endurance which never use to buy our machines have recently started buying from DISA as demanded by end customer). Our quality is such that no foundry will install machine without enquiring about disa machines at least once.New products launched like Disamatic have been doing good. At least ⅓ rd of revenue comes from products launched in last 7-8 years.

Many good things are happening in India. Increases in loading limit by govt is positive as the casting requirement goes high. First time in India overloaded vehicles are fined, So people are looking for bigger trucks. Bigger trucks were not popular in India due bad road conditions which is improving now. People were not ready to invest in bigger trucks as they use to wait long at check posts . Now with Gst and reduced waiting time people are ready to spend more for bigger trucks justifying the investment.

Demand cycle: Demand depends on auto industry and tracks growth in HCV and tractors( we are not in the segment of car/2 wheelers). Growth in heavy vehicles and tractor will determine our order book. Euro VI is hitting on April 2020. We are witnessing pre-buying now. What will happen after 2020 and how the cycle will swing we have to wait.

Capacity expansion: Current capacity enough to fulfil the demand. With existing capacity we can do 250 Cr easily. Our machines/ process has been more efficient now. With little modifications it’s possible to reach 270 to 280 cr. We have done expansion / added equipment thinking of good growth four years back which is coming now. Presently no plan to expand. If we see the demand exceeding capacity we will expand. It will take one year to set up new plant.

DIL outsources lot of work. Tumkur plant does machining/fabrication and assembly,at Hoskote only fabrication and assembly. We have stopped fabrication completely and outsourced it. Machining also we retain only critical core parts ,where we can’t relay on outsider. It’s gives us flexibility to use capacity in high demand situation.

Due to efficient equipment added in last few years our delivery time has reduced. Current environment there is nothing like slow moving orders. presently customers are picking up the machines as it’s completed.

Disa India for parent company: nothing has changed for parent company as Viraj Naidu(ex.MD) has moved up in global position. Disa India has been focus area for company and will remain bullish on India. Growth which was expected to happen from 2012-13 is started happening from 2016-17. Certain products are made like flex machines and mixers are exclusively manufactured at DIL.
High speed Disamatic are manufactured in Denmark factory but lower speed Disamatic machines suited for upgradation of smaller foundries in India. Below 250 moulds per hr products are localised to India. We can manufacture high speed in India but volume and demand for the same is not suitable at present.
Wheelabrator shot blasting machines: We have literally localised all production of wheelabrator to India.

Exports: This year exports haven’t shown growth as anticipated.That is due to certain issue . Definitely exports will grow. But as percentage it may not much difference as India business will grow better. Exports are depends on tariffs/forex movement which are hard to predict. Will do business on region wise like EU region/NAFTA,India/China region. China market size is five times higher but our market share is less as we started late. Czech Republic is important plant for wheelabrator products.Other export markets for us is Brazil/Middle East/South Africa.Middle East has good potential market for Disa India. Sales team work on geographic wise to make sure not to compete with other group companies.

Acquisition of light metal casting by parent company: It opens new market opportunity of aluminium casting for us. We have aluminium die casting machines /furnaces at other group companies( italpresse gauss / striko westofen). All three combined we can offer full aluminium casting solutions. Aluminium casting has been growing at much faster speed than iron casting. It offers opportunity for Disa India to sell machines to aluminium casting customers .These machines are primarily manufactured at Italy plant. Furnaces and melting machines manufactured at Germany and China as of now. Low metal casting had selling agent in India. We are consolidating it now. As of now there is no revenue from this segment, as it is imported and sold here. We may get selling commission from next year.

Bhadra castalloy: It was acquired keeping wheelabrator requirement of casting parts which we use to buy from outside. As such for Indian wheelabrator we need limited casting but keeping in global requirements for wheelabrator spare parts we acquired it. It has started contributing to growth due to local requirement of wheelabrator and partly due to exports as well. Norican as a group has 3 foundries each at UK,Canada and India . These three can not meet the complete demand for group.

Filters: contributes around 15% revenue. Called as fume extraction systems . Basically filters are used in all foundries to extract the dust. Other industry like steel/sand/pharma wherever there is dust/ particulate matter is coming out filters are used. It has wide general application including manufacturing of baby diapers where small particulate material which is important to absorb soaking is filtered from flying out while manufacturing and reused…Govt regulation for environmental reasons also helping it. Disa filters are of high quality, in fact they will meet more than the standards set by Govt. When the authorities visits factory and found that disa filters are in use they won’t question more. In our revenue ½ of filters sold are with disa machines and remaining half is sold as separate stand alone product. Have local competition but we choose are segments with better margins. Filters are manufactured at Hoskote plant.

Order book to sales : depending on products like moulding machines take 9 to 10 months for completion and others like wheelabrator products .take 4 to 6 months for completion. Average of nine months.

[hari1]

For furan-based sand casting process, There are suppliers like Omega Foundry machinery, who supply equipments like Sand hoppers,mixers,heating over, IR heater, Mould switching lines among other stuff. Many foundries in and around Pune region have equipment from Omega i heard. I have seen Disa machinery come in at a Green-sand based foundry unit. Because most of the castings made in green sand foundries are quite small and less complex, I think the profitability of the foundry will not be great. They may think of capex only once in a decade or two I feel.
Disc : I am from a no-bake foundry, Views maybe biased

[narendra]

DISA India has come out with superb Q2FY19 result. With increase in top line and the significant operating leverage these business enjoy, net profit growth is exponential.

Particulars(Crs.)	Q2FY19	Q2FY18	Y-0-Y Change	H1FY19	H1FY18	Y-0-Y Change
Income from operation	75	36	108.3	112	70	60.0
raw materials	43	24	79.2	68	44	54.5
employee expense	8.3	7.3	13.7	17	15	13.3
others expenses	8.8	6.8	29.4	16	13.5	18.5
total expenses	64	35	82.9	100	70	42.9
PBT	12.7	2	535.0	11	1.6	587.5
PBT Margin%	16.9	5.6	204.8	9.8	2.3	329.7
other Income	1.6	1.1	45.5	3.2	2.2	45.5
Tax expense	3.6	0.7	414.3	4.4	0.8	450.0
PAT	9.1	1.3	600.0	11	1.6	587.5
PAT margin%	12.1	3.6	236.0	9.8	2.3	329.7
EPS(Rs)	62.7	9	596.7	76	11	590.9
Orders Book	Q2FY19	Q1FY19	Q4FY18	Q3FY18	Q2FY18	Q1FY18	Q4FY17	Q3FY17	Q2FY17	Q1FY17
IN Crs	155	155	126	91	118	113	70	53	92	87

Order book at 155 Cr same as in Q1 but generally their order book doesn’t change much between Q1 and Q2.

[narendra]

Particulars(Crs.)	Q3FY19	Q3FY18	Y-0-Y Change	9MFY19	9M FY18	Y-0-Y Change
Income from operation	74.6	102	-26.9	187	172	8.7
raw materials	41.7	41.2	1.2	110	85.7	28.4
employee expense	7.6	7.2	5.6	24.7	22.2	11.3
others expenses	7.2	6.6	9.1	23.2	20	16.0
total expenses	59	78.5	-24.8	159	148	7.4
PBT	17.2	25	-31.2	32.8	27.4	19.7
PBT Margin%	23.1	24.5	-5.9	17.5	15.9	10.1
other Income	1.7	1.4	21.4	4.9	3.7	32.4
Tax expense	5.9	8.6	-31.4	9.2	9.5	-3.2
PAT	12.4	16.3	-23.9	23.5	17.9	31.3
PAT margin%	16.6	16.0	4.0	12.6	10.4	20.8
EPS(Rs)	85	112	-24.1	161	123	30.9

Orders Book	Q3FY19	Q2FY19	Q1FY19	Q4FY18	Q3FY18	Q2FY18	Q1FY18	Q4FY17	Q3FY17	Q2FY17
IN Crs	135	155	155	126	91	118	113	70	53	92

DIL Q3 posted reduced revenue and profit compared to same quarter last year bur margins are maintained even with reduced sales no.Generally DIL gets post maximum revenue in Q3 which does not seems to be the case for this quarter. Q3 Order book at 132 Cr reduced compared to Q2 order book and that has been the trend in the past as well.
The reason for low execution and order book may be due to slow down in tractor and commercial vehicle sector. Basically DIL supplies casting machines to foundries which in turn depend on them.

Sometime back I have visited local company which makes engine castings for Honda. Few points from the visit and interaction with company engineer:
They make aluminium engine casts for Honda company. It’s not easy to work in casting area of company,even though they have automated to an extent with some manual work. It’s hot environment area and not comfortable to stay there for long time. Only labor’s from certain areas of country will work there, rest will not stay for even a month. Whole process needs to be completely automated.
They have installed Zitai casting machine(Taiwan based). Most of the casting companies in India use Zitai machines.
Other companies are HMT machines(1st one to introduce die casting machine in India ), Thoshibha machines (they are costly compared to others), UBE company and Idra casting machines.
Disa India ltd is not into aluminum casting we don’t use them.
Casting machines available from range of 80 tons to? 36,000tons capacity. 150 to 250 tons is basic one.
Price varies based on capacity. For 420 tons capacity machine 1cr, 560 tons around 2.5 cr and 900 tons capacity 3cr.
We use Furnteck company furnace for melting aluminium. It’s pune based comapny. From last 5 years Furnteck machines use has increased.
They use wheelabrator shot blasting machine installed few years back. Cost is around 30 lakh. The quality of wheelabrator is excellent.
Overall it was good experience to see the whole process of casting.

[babu44b]

Hi,

Is the current correction provides a good opportunity for accumulation of this share?

Thanks,
Deb

[ChetP]

I think now is the chance in this stock. Though Unsure why this fell 6% today

[babu44b]

Hi,

The recent results were very good.But still the stock is down.wondering why the market is not liking the stock.

Thanks,
Deb

[kkumar3]

does anyone know the approximate addressable market of Disa?

[madhug]

1. One observation from the 2018 AR is the foray into Aluminium foundries. This can help them diversify from heavy commercial vehicle/tractor manufacturers and potentially open up new customer segments for the company.

With the integration of Aluminium offerings from the Group, the Company has started to offer the Indian customers on Aluminium foundries as well. These offerings are Aluminium Die Casting Machines from Italpresse and Melting and Dosing furnace from Strokowestofen. These two offerings have strengthened the offer from the Group to the Indian market, and now the Company can provide solutions on both Ferrous and Aluminium foundries.

2. Secondly, the number of group companies has gone up from 41 in 2014-15; 48 in 2017-18, and more recently to 68 in 2018-19. Most of these group companies are spread across globally and can be perceived as intermediaries or representative companies or niche players in their respective geographies. I would like to believe that these can hold potential for export opportunities from India.

3. There was an announcement today to the exchange. Tumakuru and Bhadravati facilities have started operations on 29th April, while Peenya and Hosakote facilities have reopened on 4th May 2020. The understanding is that all facilities are operating with minimal staff.

Meanwhile, I am trying to get some idea on what the market size is in India and how much of a runway does DISA India have in front of it? If anyone (@narendra ?) here has any information in this regard, kindly share here.

Disclosure: I have a tracking position. This is one of the capex sensitive manufacturing company and the stock price might have a lot more uncertainty ahead of it. Also the company is thinly traded.

[jamit05]

@madhug

Were you expecting such a sharp drop in QoQ sales number?

When does the company think the growth will pick up.

[madhug]

@jamit05 I had written to the management on 5th May 2020 regarding the resumption of operations at various plants, domestic market share and impact on Chinese competition. There was no response, however, they released a notification to the exchange on the resumption of operations on 6th May 2020.

Regarding the results

1. Usually, Q4 tends to be weak and Q3 appears to be strong. If this trend is true the company might bounce back within one year.
   
   
2. In Q4 the company seems to have done a decent job with expenses, however with operations resuming in early May, I am not sure if they can show a similar control on expenses in Q1. I expect deeper losses in Q1 and perhaps in Q2 as well.
3. The demand seems to be non-perishable in nature, therefore there is a likelihood that pent up demand might come at some point. More so because of likely labour issues for customers and the automation that DISA brings to the table.
4. Full-year EPS might be somewhere around 0 to 25, assuming a good Q3 in December. Therefore for FY21, the stock is quite expensive.

Disclosure: Invested about 1% of my portfolio.

[madhug]

Results are out. Q3 is usually the strongest quarter, but sales were down 88 Crs to 72 Crs YoY. Profits have grown YoY by about 10%, thanks to control on expenses. There seems to be no pent up demand so far.

[kkronline]

CS is not answering for any queries and he classifies all are price sensitive information.
He request to attend AGM for all questions and answers. Very arrogant.

Disa is upbeat on order book and capital investment cycle. Worth adding during decline. It is cheapest MNC. Increase in dividend also shows some generosity. 160cr cash and equivalent; MCap is 775cr. 130cr CFO in last 5 years. 188cr CFO is last 10 years. It is clearly visible CFO is strong in recent years.

VRS scheme again opened as per latest exchange announcement. So Margin improvement is still in progress.

[spartan]

Q3 RESULTS:

(In Crs)	Q3FY22	Q3FY21
Revenue	78	78
RM cost	45	30
RM as % of revenue	58	38
other expenses	10	6
total expenses	66	55
PBT	12	22
EPS -Rs	62	114

Disa India Q3 results significantly impacted by flat topline, significant impact of RM cost which has increased to 58% of revenue during present quarter compared to 38% yoy. EPS reduced to Rs 62 (de-grew by 46%).
Management does not share any information about reason for flat revenue, input cost pressure mitigation…etc .

Order book looks good:

Discl: tracking

[bozo_investor]

have written a detailed thesis on the stock here -

Disa India Ltd.: Investment Thesis

disc: invested.

[yrm91]

Great write-up @bozo_investor. Thanks for the summary and investment thesis.

There are a few data points in the sheet that are not available in the annual reports of the company:

1. Automotive segment which was 60-70% before is 50% in FY21. What other segments are making up for these?
2. Wheelabrator is 15% of India business

May I know the source of these data points?

Furthermore, global sales of the parent Norican Group at its peak a few years back has been ~500 mn Euro. Out of this, DISA India exports to Group entities have hardly been ~2mn Euro. Do you see a potential for the Indian subsidiary to export to global counterparts?

[bozo_investor]

hi @yrm91

thank you, glad you find it helpful.

the sources for the 2 data points are the AGM transcripts published by Disa (they have those for last 2 - 3 years).

Other segments are agriculture and pumps.

of this 500mn Norican group sales, how much was castings systems? as of now, im unable to determine to what extent the exports can grow. if it happens it’ll be an upside surprise since i am not paying anything for the growing exports currently.

[dd1474]

Find enclosed my notes from Disa India AGM. Please note that there is possibility of communication error at my side.

Revenue outlook:
The company’s topline has grown at 5 times GDP growth. Expect same growth rate to continue. Forging industry in India is attracting many new players as well as many established players are also looking at expansion, which would drive demand for the company products. The company is leader in Vertical technology and has almost more than 50% market share. In Shot blasting machine, it is improving its technology and has around 20% market share. The Flex technology is giving good output in shot blasting.
Disa product account for 65% of share, while 15% is from shot blasting and 17% is filters. Automotive OEM account for 70% sales while non-automative segments account for balance 30% sales which is mainly driven by Infrastructure spending. The company is also getting parent support and supplying to US market and European market.
The company intend to provide better services to customers by reaching near their location. In order to achieve these objectives, the company appointed 5 distributors at national level which cover 9 locations. Margin in After sale service are higher than margin in equipment supply.
On Digital side, the company in touch with most of large players. All new equipment it supplies now are digital ready. Nearly 80% of products are digital ready. The company expect it is long journey to digitalised all equipment. The large players are still reluctant, while small players would wait for large players to digitalised and then decide about their way forward.
In Aluminium die cast, the company currently does not find merit to start equipment manufacturing due to limited demand. In long term, once Indian market offer scale, it would commence aluminium diecast equipment. Meanwhile, it would continue with prospective customer and import equipment from group companies and meet the Indian customer demand.

Capex:
The company would not hesitate to do capex. With current set up, it can revenue topline of Rs 450 cr. The company is not selling equipment, but it provides solution to client requirement. It has increased outsourcing of non-essential activity. The increase in production not about only company increasing capacity, rather, the whole ecosystem including vendors also need to scale up capacity.

Disclosure:
I have invested in the company and hence my view may be biased. I may increase/reduce and exit from investment without informing forum. I am not SEBI registered advisor. I am not suggesting any investment action to reader.