Fluidomat - Where perfection meets technology

Rohit,

a 8% growth in sales doesnt seem too great… profits seem to have increased due to raw material costs being low. This might not hold true for all quarter…

Agree about the company being attractive based on pre tax profits on retained earnings. And with close to 5% div yield, it offers attractive entry point…

But the question is How is the company going to grow going ahead? Is it going to grow its revenues from the currrent 30 crores odd to something like 100 crores in next 3-4 years? What can be the triggers for growth?

5 PE is the norm for most small caps in this market mood but fluidomat might be slightly different from the rest of the pack.

The only risk in this one seems to be opportunity costs… And if there is somehow a bad quarter, it can be pounded mercilessly.

Hiteshbhai,

One quality that I appreciate the most about your investing style/writing is that it is firmly rooted in ground reality. I have never observed excessive optimismor unwarranted pessimism. youalwaysmaintaina fairly realistic approach.

Fluidomat has, overall come out with very decent numbers but as you rightly pointed out, topline seems to have stagnated around 30-32 crores. Though, their margins are expanding leading to robust growth in bottomline. however same can not continue for long as you said. However, context to stagnated sales number is that company has maintained sales and improved marging in very challenging economy. Especially when some of the major consuming sectors (Power/cement/coal) are in very bad shape. Hence, this further supports that underlying hypothesis that company is into a business with sound economics. Moreover, Fluidomat is one of the well accepted and recognized fluid coupling manufacturer in the industry.

However, I have observed over few years, that true multibaggers are the one where opportunity size is large (considering the base) and company has plans to tap the available opportunity and underlyingbusiness economics is strong and preferably have pricing power. There is no definite information which can give pointers to Fluidomat’s management’s views on how they want to tap the available opportunity (which I believe is reasonably large considering range of applications in which fluid couplings can be used and product portfolio that Company has). Even though, past track record suggests that company has consistently scaled up at brisk pace, it will bedangerous to extrapolate the same to project the future.So I draw two scenarios

  1. Company grows at rate of 10% (way below historical average): In this case, considering that it is a small cap and average PE will notbe more than 5-6,theprice appreciation will also be 10% over long period of time. In addition, sincecompany has asset light model,if company is not going big bang expansion,additional cash will be available and hence maintaining at leastexisting dividend payoutmay not be difficult, which is 5-6%.So, inpessimistic scenario, my returns will be 15-16%.However, as you rightly said,the only unknown cost will be the opportunity cost.

  2. On the brighter side, if company grows at 20% (still less than historical average, but reasonably optimistic that growth ishappening overlarger base) for few years and there is re rating in PE, it can give multifold returns.

As I understand from few people tracking the company and who have interacted with management,Company is focusing aggressively on Exports to Australia and middle-east to tap a large market there.In addition, revenue from replacement parts is also going to grow significantly as they sell more and more couplings.

So, looks like a decent opportunity to earn adequate return (if things remain subdued/average)while getting exposure to significant upside. Will be glad to hear your views.

Best Regards,

Dhwanil

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Dear Hitesh, Dhwanil,

Thanks for your comments.

One of the shortcomings here is that we don’t have access to the management or their market estimates / projections, and thus, this is very much unlike Ajanta or Kaveri or Mayur or any other Valuepickr favorites. That being said, Fluidomat has increased sales by ~7x in the past 10 years, on the back of increasing price and/or volumes. I believe this trend might continue going forward. As far as I understand, the market opportunity is huge (we don’t know the exact numbers) - both in terms of new buyers (in India as well as abroad) as well as existing customers via repeat business.

Some might compare it to Hawkins…it’s just that unlike cookers, customers don’t exactly wait for 15-30 years before replacing/purchasing a fluid coupling :)Given the reasons highlighted above and in the earlier posts, I don’t think the stock is going to be hammered because of one or two bad quarters. Hawkins is one of the best examples of how stock stories survive despite what might seem to be a poor set of results to most investors. As long as the long term story stays intact and there is no fraud, there will be buyers, including the promoters (and yours truly) if at all a major fall happens.

The question is not whether they can increase the sales to 100 odd crores in 3 years - (my answer to that question is I don’t know)in fact, such questions are difficult to answer in case of most companies - the question is, could this investment make me adequate returns considering the other opportunities available in the market, and my answer is yes. I look at this opportunity in terms of different growth scenarios, and the opportunity is a modest compounder (inflation + few % points + dividends) if they do just about okay and a multibagger if they do well and get re-rated by the market.

rohit, and dhwanil

You both have put up the investment argument in favor of fluidomat very clearly…

I appreciate this kind of clarity of thoughts. One should know why one is investing in a particular company…

If the company can grow their revenues consistently even if it is a relatively slower pace of 15-20% cagr for next few 2-3 yrs it is likely to provide good returns.

Two problems I see is opportunity costs and portfolio allocation… How much max can one allocate to fluidomat.

regards

hitesh.

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I’m not able to understand the business and the products/services offered by the company. Can someone explain it in simple layman’s language?

Secondly being a Rs.13 crore balance sheet and Rs.3 crore profit, is the potential really that great? Whats so special about this company or business?

Hey folks,

Fluidomat Ltd.Excellent financial track record of last 9 years(except the high interest cost till 2010),good growth,above average profitability and low capex as a percentage of earning,all in all the company looks attractive business on paper and with the current valuation seems seductive.

But is it a franchise or a commodity business?

1.The promoter claims that the technology is indigenous and has not even mention the wordcompetitionin last 7 years MD&A.So,the first thing that comes to mind is may be the product isunique,but experts from this segment tell me that the product is no different from the other company’s product.There is a German company which is a leader in this segment in the whole world and its fluid couplings are priced @ 5 times Fluidomat’s coupling price. Primer Transmission of thapar group is another major player in this segment.

Basically there are three players in this industry in India and the company is one of the three which sells the product @ 1/5 the price of the world leader.The industry is not very competitive and any new entrant needs to have the technological know-how.So,definitely this is not a franchise,but a low price seller.

2.The fuss about the fact that this is the only one which manufactures high range fluid couplings is not true.One can check with the dealers of its competitors.

3). The company was making huge losses till FY03 and the Double edged swordDebtgave it good amount of trouble till FY09 and to expand the company needs to take some debt and with the sale of its product significantly dependent on economic scenario,i would be skeptical about its survival if it takes debt.

4). The market of fluid coupling is not very big,probably 20% of existing coupling market and the sales force needs to be efficient enough to educate customers to accept FC. which means it requires a skilled sales force.Power of supplier is above average.

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5). The customers being big and integrated too seem to havesignificant bargaining power.

6.If in the future competition intensifies as it is beginning to with the imports from china, the company will be bound to compete on the ground of price and will end up handing over its profitability to the customers.

7.The company is run by the jain family(almost every family member is involved in the running of the business).With Mr. Ashok Jain being the “steve jobs” of the company and who is 63 years old now,if not more and his son Mr. Kunal Jain being a B.com graduate,after Mr Ashok Jain who is going to do the R&D to maintain the profitability??

8). The capital intensity of the business seems to be low,there is a high probability that it will increase with more capacity utilization.

9.The owner’s family is charging the company 3.3% of sales. Isn’t it high?

10.does the financials look attractive due to recent growth in manufacturing sites?? (the competitors say so.)

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This story really is phenomenal. As per talks with the management domestic fluid couplings market size is 400 Cr, and they are confident they can grow at 15-20% CAGR over the next 3 years.

The biggest reason why this story has been unrecognized for long is the unfriendly management - mostly unfriendly to minority shareholder inquiries. Find below my conversations with the management:

I was wondering what other’s experiences have been on talks with the management. @Shrey, Hitesh, Ayush, Dhanwil, Rohit: Did you guys try giving a call? I believe this is the person you need to be talking to:Pramod Jain -+91 07272 268114, who is the VP & Compliance officer. Love to hear your experiences.

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Once again, the company has come out with interesting set of results. Almost 35% increase in NP with de growth in sales. Similar trend has been observed in last few quarters as well. Also, the NP increase is largely due to reduction in cost of material. This is slightly perplexing considering the inflationary pressure. So, though, in terms of results, once again, company has delivered, few questions remains unanswered. As Prasanna is suggesting, if we can catch hold of management, we may be able to solve the riddle.

Discl: Continue to hold shares @ average price of 28.

Regards,

Dhwanil

Thanks for the update Dhwanil. Is there some tool that helps you keep up-to-date on results? I follow the company on screener but apparently screener takes a while to crawl it.

Also did you try your luck calling the management?

Good results. Management has indicated 15% sales growth this year. Margin increase was expected like they said in the recent management interview.

Hi Guys…

Came across some red flags about the management… Have not cross checked.Here is the link

( Point 5 & 6 in Risk and Concern ).

Regards

mallikarjun

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Why no updates in this thread;
Just read the Annual Report 2015, CMD remuneration up by 42%(7.8% of net profit) despite of flat profits. Is it too high? Is there any regulation for promoters salary?
They are claiming that flat revenues due to delay in customers projects. Balance sheet also shows increase in inventory.

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@ravindra

Generally CMD remuneration upto 4-5% of the profit is considered reasonable and at optimum levels. 7.8% is definitely very high.

@chiragjain1976
Yes, But if you see the figure 40lacs annual salarie may not be so high for CMD. Isn’t it?
Is there any regulation?

Fluidomat reports best ever quarterly sales.Overall good result.

Anyhthing on the company, there has been a run up

Very niche and focused business in the Capital Good sector. With the investment and capex cycle expected to rise will have a direct impact on the niche couplings that this company specialises in.

Zero debt. Market Cap of 100 crs. Excellent and regular dividend paying. Last year annual sale was ~36 crs, this year Q2 FY23 sales is ~13 crs. If I recollect right this qtr was the highest ever quaterly sales and profit. Decent promoter holding. Hardly expensive, still undervalued and not discovered to my mind.

If you have a holding sit tight, journey has just begun.

Disc - Invested so views may be biased.

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While the revenue remained fairly stagnant between FY12-21, something seems to have changed after that between FY21-23, wherein revenues jumped from 27.81crs (FY21) to 46.16crs (FY23). Their plant machinery assets have gone up from ~9cr (FY21) to ~11cr (FY22), but not much information is available on what changed after FY21 both from the market and their capabilities point of view. Would love to understand what changed if anyone is aware of the reasons.

I was researching the company but very less information available. I’m from the industry where fluid couplings and other types of couplings are used. One thing I can tell is don’t rely on replacment cycle of fluid couplings. The replacement cycle is very long. like 5-6 years as they don’t get damaged easily. So better to see how the sales can increase if there is fresh demand. I could not find much information about the company.

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Don’t look at revenue alone. Check the volumes, revenues might increase due to increased raw materials as well.

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