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.
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.)