Fluidomat - Where perfection meets technology

Debt-free microcap with high competitve advantage that comes from technology, product quality and management (just type fluid couplings on google and you will understand; also check wiki and any purchase manager working in a factory). Management increasing stake consistently. Dividend (1.25 announced, 1/sh for fy11, cmp of ~37.8). A large number of clients spread across industries limits macroecnomic risks. The company seems to have sufficient pricing power to pass on the raw material costs (mostly Aluminum) to the customers. Further, there is a little chance of the orders getting canceled, because nobody would order fluid couplings if they dont need it. Good roe, roce, sales and pat growth. Production capacity of ~1500 fluid couplings but have sold more than that in some years. Being a microcap, associated risks include low traded volumes. Other risks include raw material price fluctuation and competition from large players / other technology. Price Earnings profile for past few quarters suggest this could easily trade above 50-55. Currently trading around 5x p/e - much lower than historical rates.

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Looks good. I like the consistently improving track record! But again too small a company.

Will read up more on the company. No hurry, better price-points will be available.

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Although there are no direct conparisons, but Mayur was also small and just 66cr revenue and 2.6cr profit firm till fy2007. A 273cr mcap company today, it has gone up c. 25x in the past 3 yrs or was approx 11cr mcap then. It just got discovered and rewarded during the process.

Here the question is not about 25% cagr, because the likes of hdfc and itc can do that for us. The question ia about paying peanuts for fast growing, high roe, debt free company enjoying a huge brand recall because of its quality and technology.Question is whether this can become 5bagger or more in 2-3 years.

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Fluidomat looks like a psuedo-infra play. Their clients are mainly infra cos - ports, cement, power etc. Infra sector revival would be key for the growth. Also the debtor payment days are higher. Too small a company but the quality/technology of products looks good. Need to dig more. Also need to know the promoters.

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I also have some exposure here and looks interesting. We should try understanding the future prospects.

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Good historicals…

1 thing I couldn’t understand- Their capacity is 1500 for past 5-6 years. Why haven’t they increased the capacity? Limited demand??

How long can sales grow just because of passing raw material costs to customers??

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Sorry not able to paste tables from my ipad here…but answer to your queries below:

They have produced and sold more than the installed capacity in FY09 and FY11 (1704 and 1776 respectively in FY09 and FY11). However, we dont know how and why that happened. One can speculate how many fluid couplings they would sell in the next 3-5 years, or find out the order book from the management, but that will be of little help. Fluid couplings are very interesting products - while a factory can manage with repairs for some years, it will order a new fluid coupling only when it needs one and will be willing to wait a few months for delivery. Its very likely that it will not cancel the orders midway. As such, order book of the company is going to translate into sales as and when the company delivers the orders. Further, these are recession free products…while is not wrong to assume that their growth will increase with the infrastructure growth story, but they can manage alright without it (unless everybody goes out of business in which case it doesnt make sense to invest in equities at all) - these products are to a factory what products like undergarments, presssure cookers, toothbrushes are to individuals. You need them and buy them.

For those who dont know yet, the price of fluid couplings sold by Fluidomat has increased from ~70000 from fy06-09 to ~100000 in fy10-11. They might increase the prices in the future (read explaination below), which would increase the sales. But, it****will be wrong to assume the company has increased sales just because of increase in price in the past few years…sales growth has come from a mix of increase in vol. sold and increase in price.

**If you look at yoy growth in cost of materials consumed (aluminium, others and components) from fy06-11, growth in sales value of fluid couplings and total sales has lagged behind.**As such, there is room to increase prices and increase sales and margins. Also, while cost of these materials as % of sales has increased from 35.1% in fy06 to 44.2% in fy11, ebitda margin increased from 16.9% in fy06 to 19.3% in fy11 and 21.3% in fy12. They have managed other expenses quite well. Fall in cost of raw materials will further swell the margins.

Also note that while they also sell spares and components, sales mix (considering only the value sold of fluid couplings and spare & components) has been ~80% fluid couplings (decreased marginally from 80% in fy06 to 77% in fy11). This is good stuff. Fluid coupling produced to Aluminium consumed (in kg) has more or less remained around 1.7

All this while the company has continued to increase sales, RoE, RoCE and improve working cap to sales and capital structure. And started paying dividends :slight_smile:

The most important value driver where one needs to build a view is around the number of fluid couplings the company will sell in the next few years. Will they sell 1500/yr or 2500, who knows? What I do know is that I am investing my money in a quality business with strong competitive advantage run by able managers and is available at an attractive price.

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Agree, Rohit when you say "What I do know is that I am investing my money in a quality business with strong competitive advantage run by able managers and is available at an attractive price"…

But to allocate a high %age of portfolio to this quality business we should try to find out-

Whyno increase in capacity? Yes, for some years utilization is more than 100% but again the question is- Is that sustainable??

May be a management meet…Donald Sir.

For small portfolio allocation this looks quite good.

For significant bets, one needs to find out whether company can go up to 100-200 crores sales in next few years or not from current levels of 28 crores.

Maximum money in stocks is made when we catch hold of companies on the cusp of explosive growth. (of course other parameters like low debt, high promoter holding, high returns ratio, good dividend payout etc do matter)

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As per a friend who had met the mgmt, they are targetting very good growth going ahead. We should try doing a mgmt meet here.

Indeed. The growth in order book as of Aug month, as reported during AGM in the past few years has been impressive. Additionally, they have had some pending orders from previous years. If I am not wrong, for FY13, they have an order book of more than 31cr and should be able to meet it.

Could you check with your friend if he can arrange a meeting for us some time? We should get in touch with them ourselves as well. I guess the more the better (easier for them to organize a factory visit, etc)

I have started building a list of questions (see below), and we can add and refine this list. Request all of you to provide inputs.

Market

1). What is the market size of fluid couplings in India and globally?

2). What has been the historical growth rate in the market and growth expected in the future?

3). What is our market share in the Indian and global fluid couplings market?

4). What is the distribution of new vs. replacement demand?

Product

1). What are the key advantages offered by fluid couplings?

2). How does Fluidomat’s products/technologies differ from its competitors’ products?

3). Which products could serve as a substitute to fluid coupling?

4). What is the typical life of a fluid coupling?

5). Does the company have sufficient range of products to make possible continous rise in sales in the years to come?

6). The average price for a fluid coupling sold by the company has increased from 70000 in FY2006-2009 to 100000in FY2010-11. Could you please help us understand why that happened? Are we planning for a similar price increase in the future?

7). In the past five years, the number of fluid couplings produced and sold by the company have increased. Could you please explain what led to this jump? Is a similar jump expected in the future as well?

8). A couple of times in the past 5 years, in FY2009 and FY2011, the company has sold more number of fluid couplings than its installed capacity. Could you please explain how a capacity utilization of more than 100% was managed?

9). Given the increase in volume sold, are we planning to increase the installed capacity in the next 2-3 years?

10). What is our current order book? By when are we planning to complete these orders?

11). It doesn’t seem like the company follows a strategy of aggressive marketing. As such, could you explain in brief your marketing strategy and how you are trying to position yourself in the market?

Company

1). As an organization, where do you see Fluidomat 3-5 years from now?

2). What is our sales target for FY2015?

3). It seems like while the total expenses and cost of materials has increased consistently on a year on year basis since FY2006, the growth in total income and sales of fluid couplings has lagged behind. Given this, is the company planning to increase the prices of fluid couplings in the future? Also, during the same period, EBITDA margin has increased impressively. Could you please point what led to this margin expansion?

4). Who are the top 5 customers of the company and approx what % of sales are accounted by each one of them?

5). What is the approximate contribution of foreign customers to the company’s revenues? How is it likely to change in the next 3-5 years?

6). Is the company planning to recruit any experienced industry professional in near future?

Competition

1). Who are your top 5 competitors in India?

2). What is your approximate market share in the Indian fluid couplings market? How much is it likely to be 3-5 years from now?

3). What are some things that differentiate you as a company fom your competitors?

4). If there is one company that you truly respect in the field of fluid couplings, which company would be it? Why?

Hi All,

excellent discussion on the company. In my opinion, fluidomat is a simple business that has steady demand profile due to replacement demand generated for this product. As I understand, there are not very many manufacturers of fluid couplings in India (Parag engineering and premiere transmission are other two). Fluid couplings are used in so many applications where initial torque requirement is high. It is one of the most energy efficient ways to start high torque devices. If you look at the earnings/market cap graph, since 2007, company’s earnings have grown by 400% while its market cap has slightly degrown (-10-15%) in last 5 years. What I like most about fluidomat is well diversified and marquee list of clients and “consistency” in growth and return ratio. I think at 17 crore market cap it has good potential upside with limited downside.

Best Regards

Dhwanil Desai

http://valueinvestinginpractice.blogspot.in/

I believe the stock has to get recognized,however good. The money flow to the story. What is the factor that’ll get this stock recognition.

Views invited.

problem is getting hold of a substantial chunk of shares without hiking price too much. for a stock priced at around 36-37, liquidity is very poor.

and betting 2-3% of portfolio is not going to make too much difference in portfolio returns.

Liquidity is low, but I don’t think digits or price has anything to do with it. That ways, Shriram City Union Finance would be categorized as worse because of poor liquidity even though price is in three digits :slight_smile:

Who is selling the shares?

Clearlypromoters are not selling, instead, they’re buying from others.

While the number of shareholders went up from 5167 as of Mar-2007 to 5636 as of Mar-2008, it got reduced to 4961 by Mar-2011 (and I wont be surprised if further went down by Mar-2012). Not surprisingly, 587 out of 675 shareholders (who got out between Mar-2008 and Mar-2011) belonged to the category of shareholders with less than 10000 shares. Further, during Mar-2008 to Mar-2011, shareholders with more than 100000 shares increased their stake by 8.8%, by buying from other shareholders (4.6% came from shareholders with less than 10000 shares of which 3% from those with 4001-10000 shares). In fact 3.9% of the company was sold by shareholders with less than 40000 shares to those with more than 40000 shares (3.6% bought by shareholders with more than 100000 shares).

Somebody has been sweeping everything available on the table.

As I had mentioned earlier, our dear promoters have been the major buyers of whatever stock has been sold (whatever the reason be: fear of being bought, putting their money where their mouth is, prospects are bright, etc.). But clearly, they have bought from those with fewer shares in the company or the weaker hands or those who figured other avenues. I****am sure numbers for 2012 will tell a similar story.

If one has to acquire a (substantial) position, one will have to compete with the promoters (unless they are not buying anymore) or others who are optimistic about the company. During this time, the more the price falls the better for long term investors. However, this will be atleast 25% grower with downside protection offered by dividend and cheap valuation.

Hi All,

The one worrying factor of the company is the production capacity. They have not increased the production capacity since 2006-2007 at least (That’s the last balance sheet available on there website.Does anyone have older balance sheets like from 2000.) and they are currently running above the production capacity. If they have plans for increasing the capacity then what is the cap-ex we are looking at? This will help me answer if they can fund the cap-ex from internal accruals or will they need access to market. The is debt free so accessing market will not be problem.

Also if the majority of growth has come by improving the processes to reduce the rejection of the coupling then the growth in the coming years will only come through raising the price. (I don’t mind an efficient company). So the question that I have is What allows the company to raise prices. This will allow me to understand the moat of the company if at all it has it.

I am very skeptical on the growth.

Thanks,

Yogendra

Hi All,

I was researching one of the competitors of the company and found that Premium Transmission deals with fluid coupling in the range of 0.5KW - 1000KW, where as fluidomat fluid coupling upto 3500 KW. So now if we can break the sales of the company by upto 1000KW and above 1000KW we can get some interesting picture of its competitive advantage.

Thanks,

Yogendra

Even though installed capacity as certified by management has remained constant at 1500 units actual production has increased from 1220 to 1776 (45%) in last 6 years. I do agree that this increase on CAGR basis is marginal.

However what is heartening to see is the realization from fluid coupling. In 2005-06, sales realization per fluid coupling was 61116 to be precise. That went upto 1,02,000 in 2009-10 and roughly 98000 in 2010-11. This can be result of

)- Moving up the value chain and producing more value added products

Or

)- Company’s pricing power for the products

In my opinion, higher price commanded by the company is due to value added products developed by the company such as scoop type variable speed fluid couplings which are technologically more complex.

It is also intresting to note that company’s spares contribution as % of new sale has increasesed from 22% in 2006-07 to 30% in 2010-11 and as more FC are sold, this contribution is going to be incrementally higher.

In terms of pricing power, I do feel company shall be having pricing power as there are not very many players in high power- variable speed fluid coupling market. Thus company’s products will be benchmarked against products from international companies. Typically the differential in price for engineering products from India and Europe/US is 40-50%. Thus company shall be able to charge decent margins and still remain competitive.

Since I am associated with power sector, I had checked out with some of my contacts in coal based power plant (coal handling unit uses substantial number of FC) and most of them have given positive feedback about the quality of the FC from fluidomat. So, I feel more confident of company’s ability to retain market share at slightly higher price point than that of its doemstic peers (though not many except Parag and Premier)

Best Regards

Dhwanil Desai

website.Does

Promoter have increased their stakes from around 27% in 2006 to around 50% in 2012.

Thanks,

Yogendra

Q1 results out…sales almost flat yoy at 5.15cr vs 5.32cr in Q1FY12; eps down to 0.99 from 1.29 last yr. In terms of numbers, this is the worst performance in the past 6 quarters. However, I think this needs to be evaluated in terms of annual results than quarterly results as pointed by the management in the results update as well. However, quarterly sales and order book need to be monitored. Continue to believe in the story and hold.

LTM EPS now stands at 6.96 which at CMP of 37.5 means 5.4x LTM P/E. I think it will continue to trade at 4.5x - 6x LTM P/E for some time. Anything less will provide a very good entry point.