Dynamic Cables - Much more dynamic in 2022?

Stock Opportunities
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TL;DR; Looks like a damn cheap cables firm, with solid clients, superbly placed for the capex boom in power sector, with optionality in another capex boom area - railways.

Details

As a proxy to India Capex boom, I was looking at cable companies, KEI and Polycab in particular, on screener. In the peer list, I found Dynamic Cables.

Numbers first

  • 0.4x industry PE,
  • 0.39 PEG.
  • Sales and profit growths - 64 and 215 % resp.
  • Market cap 390 Cr, Sales 607 cr.
  • Price 178, Book value - 67, Intrinsic value - 247.
  • ROE, ROCE 20+.

The numbers look very attractive to me even after almost a 2.5x run-up last year. In fact, you could almost think of the run-up as proof of the pudding.

So I came to VP. And shockingly, there is no thread on dynamic cables here. Just a couple of forgotten comments. And one of them, Yogesh's blue chip 10 Portfolio - #208 by Yogesh_s is extremely damning. But note, this is from 2018; and in 2018, every bit of it was true. My guess, therefore, is that everyone who comes to VP does a search, gets to these two comments and quickly forgets about the firm.

However, in 2022, to me, this looks like a case of ‘the land that time forgot’, I mean, ‘the firm that VP forgot’. I think this merits a second look as of now.

Most of the information here is from the Annual report - So I’ll keep my text short and use screenshots liberally. Link to the AR at the end.

Business.

Note the Railway signaling cable segment.

Key risks

  • raw material prices - PVC, copper and aluminium
  • recovery of dues - weak financial position of power discoms
  • debt management.

Debt management seems on track.

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Other risks, like client concentration, geographic concentration, foreign currency exposure with no exports, low value products accounting for large share of business - these look like they are being handled right by the management (walking the talk)

  • Reducing low value business segment and moving to high value,

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  • Growing exports to offset input raw material costs, and has

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  • Started a new signal cable line which has railway clearance and is expected to be a high growing business.

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Other things which worry me

Stuff buried deep in the Annual Report, like -

Page 59 -
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Page 61 - Point 5.iii
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A quick search of frauds brought up this - Havells, Gupta Power & many others Blacklisted by UPPCL – CableCommunity.com.

And there are a few cases/appeals going on with the government

One other bothersome thing - This firm looks remarkably similar to CMI Cables - which has a thread on VP. However, the direction in which CMI is moving does not look great at all.

Conclusions

Overall looks like a business coming out of headwinds straight into a home stretch with sectoral tailwinds.

The breadth of clientele, the expansion into foreign markets, the debt reduction all point to management doing the right things. The new factory of Reengus in 2018 seems to be finally bearing fruit.

The real kicker is the railway signaling segment and the significant growth in exports. Proper execution on these fronts should propel the company well into its goals for 2025. One of these goals is a topline of 1500-2000 Cr by 2025. If I assume company achieves its goals, and Price/Sales rerates to 1x, we are looking at a significant upside.

Is there something I am missing? Views requested from esteemed boarders.

Disc: Have a starting position. Looking to accumulate.

AR-2022 - https://www.bseindia.com/bseplus/AnnualReport/540795/74005540795.pdf

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What I think is that, for company likes these where there are clear hurdles like recovery of dues, concentration of customers, no institutional participation etc., we can look at the management. Know about how they have started, what has been their vision, what they have done so far, what they want to do. There is a recent conference call recently which should say something about the future of the business.

I think if indeed there is a capex, capacity utilization, demand, margin growth etc, institutions will participate. On the other hand if there is no such participation, and even if the valuations are comfortable w.r.t peers, even if the management is trustworthy and efficient, no red flags, one may get stuck for longer periods. Of course this is part of small cap investing, and of course this is how one finds multibaggers.

Just some thoughts and some recollections from the past.

No investment, no interest as of now, just had a cursory look.

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The promoter of the company, Mr Mangaal is an inspiring enerprenuer, I had heard few of his interviews and read few too, also attended AGM in 2020 online. They are direct beneficiary of Railway electrification, which is the place from where this huge growth is coming from, Also the good thing is that the company has been running quite efficiently which can be seen from roe’s and has been generating good cashflows and also reducing debt. I am not saying that they have some moat or anything, the business is quite average, but I like the way Mr Mangaal is running it, can also be seen in numbers. Who knows they repeat what KEI did. Promoters have been continuously buying. Which is a good thing.
Disc: Invested at around sub 20 level.

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I have been studying this company since last week.

One red flag that came up in their RHP was that on page number 100 in second paragraph they said that they conduct business based on oral contracts. This seems risky for a company. I sent them an email seeking clarification about the same, and the reply that came back was “Currently, the sales contracts are largely through written purchase orders detailing the terms of sale from our customers.”

This could potentially (due to the word “largely”) mean that there are still come contracts that are being carried out on the basis of mutual trust and understanding.

Also, at the moment they do not have any plans on entering B2C segment like KEI, Polycab, Havells etc.

I have recently started investing, but doing business based on oral contracts seems risky for a listed company. Can someone with more experience chime in.

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The stock price has risen by almost 20% in the last 4 trading sessions and closed today (16-12-2022) at Rs. 196. Huge delivery seen on 14 December with an average price of Rs. 199.3 Does anyone know what triggered it. And who or which entity took that delivery. Stockedge is not showing any pertinent information.

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My limited understanding here is that with RDSS and transformer play in motion, power cables would have fixed business going ahead. Someone surely has deep understanding of the same and are building up positions for few quarters

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Hi Vignesh, can you please share your thought process about how RDSS would limit the business.

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https://recindia.nic.in/revamped-distribution-sector-scheme
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It doesnt limit the business, it actually helps power transformer cable business to improve here on.

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Credit rating upgrade- Rating Rationale

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dynamic cable rating report - as per data in report, they should post rev of 228cr (qoq 153cr, yoy 158cr), raw material copper and aluminum price little softened, so margin should maintain or to be little better, can expect a robust Q4? :crossed_fingers:

Disc: Invested and biased

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This NOTE does NOT delve into Dynamic Cables specifically but provides an Insightful Sectoral overview of ALL the 20 listed Power Cable companies in India.

:beginner:

Power Cables are to Electricity, what Roads are to Automobiles.

If we’re going to hit the 5$ Trillion GDP mark, we’re going to need a hell lot more Energy/power/electricity!

Wires & cables being the carriers of Electricity, are fundamental to our growth goals as a nation :india: So, In this note, we’ll conduct a mostly Quantitative Analysis of 20 Listed Power Cable companies in India.

Some (not all) of the Ratios we will be using are :



Also, just some ultra-basics: Power cables are usually categorised according to the voltage of the current they can carry.

They are categorised into Low voltage (< 1000 Volts), Medium ( 1 - 36 KV) & High Voltage (36KV+).

Their respective use across the Power Value Chain are illustrated below



With that basic background, Let’s Go! :checkered_flag:

  1. Market cap distribution: Only 4 (20%) of Companies have a Market Cap of 10,000 Cr+, which is unsurprising. Even between those 4 largest companies, the variance in M.Cap is huge (Pareto’s 80/20 principle)


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Log scale (Data as of 5th April 2024)

  1. Does Size Matter? : Data (ROCE last 5 years) suggests that Size matters for the Industry. Larger size begets more efficiencies and economies of scale. There are 3 noteworthy points in the Historical ROCE chart below.


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Source: screener.in data | Left to right: Highest Market Cap to lowest.

  • ‘Size Matters’! This is evident from the chart below which shows Polycab & KEI seem to have consistently high ROCE, most likely because of their larger size (NOTE: Size should ideally be measured in Gross block terms no M.cap)

  • Dynamic Cables is an anomaly in that it has consistently (last 5 years ROCE) maintained high ROCE vs 18 other peers.

  • The sector is experiencing is positive uptrend (Improving ROCE). Not surprising given the increased spending on the Power/Real Estate/Infra Sectors.

  • Some of the differences in ROCE amongst players may be explained by the Business Models i.e. their B2B vs B2C mix, their product mix etc. That analysis would be a logical next step i.e Performing Deep dive into specific companies

3. Smaller companies have higher Debt & lower Interest Coverage


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Left to Right: Highest Market Cap to Lowest Market Cap companies in the sector.


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:star2: The higher debt for smaller companies is mostly working capital Debt.

Working capital days (No. of days to convert working capital to sales) for smaller companies tend to be higher (unsurprisingly). Higher WC days would lead to higher Working capital debt (measured as % of WC to Sales)


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  1. Asset Turnover

Larger players tend to have higher Asset Turnover (Sales / Assets) which means they’re able to squeeze out more rupees in sales from every rupee of assets held.

There are also positive and negative anomalies amongst the pack, as shown below.


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source: Screener.in Data |

RR Kable and Dynamic Cables are examples of positive anomalies.

Finolex and Universal cables are examples of negative anomalies.

At least amongst the top 4 players, FMEG could be the reason why RR Kabel has a notably higher Asset Turnover.

RR Kabel derives 11% of its Revenues from the FMEG Segment - Fans, lights, switches etc whereas Polycab derives ~8% of its Revenue (9MFY24) from FMEG, Finolex (< 5% Revenue from FMEG) whereas KEI is NOT present in FMEG at all.

  1. Operating Profit Margin (%) [EBIT / SALES]


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Operating profit Margin (%)

Dynamic cables and KEI Industries have the most consistent margins across timeframes and Ultracab & Relicab (< 200 Cr M.Cap) have shown the sharpest improvements in OPM (%).

Finolex’s shrinking margins could be a sign of shrinking pricing power (assuming it has some, to begin with) or poor operating expenses management etc.

Whatever the root cause, shrinking margins make markets unhappy. This may be one (of the many) reasons why Finolex trades at a significantly lower PEx (< 26X) vs peers.


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The above chart also displays one of the hallmarks of Wealth creation in the stock markets: P/E Re-rating. And when it rains, it pours!

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Every single (almost) co’ in the sector has undergone significant re-rating (Exceptions: V-Marc & Ultracab) and judging by the the multiples, it’s unlikely there is room for further expansion, at least for most companies in our cohort.

As for Why V-Marc India trades at such a low valuation? It’s just Fraud baby! :sweat_smile:



  1. Sales / EPS Growth

Finally, the growth metrics. Firstly, the last 3 years Avg growth may not be the best metric for visualising/judging the recent change in Sales/EPS, however, using the data below there are 2 key observations we would like to comment on.


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:star2: RR Kabel and Finolex have not been able to grow EPS as fast as Sales (why? Worth exploring in the next step: co’ wise research)

:star2: Ultracab has shown EPS growth much significantly higher than Sales (including Jigar cables & Cybele Industries)

  1. 1 Year stock price Returns

Want to guess which stocks gave the highest returns in the last 1 year? (Not that it has any predictive value). Here’s the jaw-dropping data :

:point_right:t4: 7 / 20 Stocks gave a 100% + Return

:point_right:t4: 9/20 Stocks gave an 80%+ Return

This reminds of some Key lessons we can learn/re-learn from the stock price behaviour of stocks/sectors :

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:star2: If you get the sector right, the probability of making satisfactory returns goes up!

:star2: When a Sector Turns, the best stocks in the sector rise at first and as the cycle continues, the relatively worse (sometimes smaller) players tend to do better than even the best companies (returns wise) because of the delta-from Shit to hit!


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Delton Cable surely has my attention and curiosity. The question is: Is it another pump or Dump or is it a special business? Should we find out more?

Tell me in the poll below because a logical next step in my opinion (you can share yours in the comments) is doing a deep dive on any 3, under 2000 Cr Market Cap companies and I need your help to decide :balance_scale: which ones.

Just name your Top pick :game_die: Go !!

  • Universal Cables
  • Paramount Communications
  • Dynamic Cables
  • Finolex Cables
  • Ultracab
0 voters

Hope this was insightful, would love to hear your thoughts

Rahul

:india:

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