Frontier Springs - has departed, whats the next destination?

The Company is engaged in manufacturing of Coil Springs, Leaf Springs, LHB Springs and forging items.

  • Springs for LHB Coaches
  • Suspension Coil Springs for Freight Stock
  • Suspension Coil Springs for Coaching Stock
  • Suspension Coil Springs for Diesel and Electrical Locomotives (EMD, WAG 9, WAG 7, etc.)
  • CLH and VLH Coil Springs for Power Sector (BHEL)

Frontier Springs Ltd. comprises three different units all working in synergy to fulfill the demands of clients and also developing new products periodically.

Its major client is Indian Railways which is witnessing a lot of modernization and developments.

The company has received many orders of the Springs which are used in LHB coaches. LHB coaches are being used in super fast trains like rajdhani or shatabdi. These coaches were being imported earlier and now they are being made in India. The company has benefited from this which is clearly visible in its performance over last 4 years.

company has stared production of air springs which will be again used in metro and LHB coaches. This will be an import substitute.

The company has also received orders of springs for Metro coaches from Chennai and another state. This also opens a door for further development.
Company is continuously expanding its product base. Approval of spindle rod, Anti roll bar, Anti roll bar bracket & Anti roll bar fork have been obtained from Rail Coach Factory; Kapurthala

Following are the financials of last few years where we can see consistent improvements in sales and profits. Interestingly, profit margin is also improving YOY.

Current market cap is 70 crores and profit of the company in TTM is around 8 crores. The company has not diluted equity in many years. Company’s website seems to be good for a 70 crore market cap business, no that this is anything to base decision off.

Risks :
Major risk is that the company’s revenues are highly dependent on government spending which is always lumpy and risky.
Other risk is that the company might be at the peak of its good days if subsequent orders and projects don’t fructify from the government.

Disclosure:
Evaluating, no investments

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Thanks Pratik for starting this thread. The results look impressive and overall numbers look good for such a small company.

Have you done any research on the Corporate Governance and how is the promoter reputation and conduct over the last 10 years. Any information of any wrongdoing needs to be scrutinized in detail. As the habbits don’t change.

As the first thing to evaluate in smaller names is the Corp Governance as majority of these names have such issues.

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Being such a small company, not much is available in public forum for its promoters. I evaluated the business and looks good at current state but I did not end up investing because of heavy reliance on government orders and possibility of this high price already discounting the triggers.

Management is highly reputed and has good name since many years …recently they have done capex also at there existing facility they have added one line of production also company has stated supplying air springs which will have higher margins and will be used in metros …we expect company to post 30 rs eps for current year …will also be attending AGM in kanpur and upload the notes …

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Jimit, Frontier appeared good on prelim check.

Could you help with following questions -

  1. When did the Railways implement the LHB coach import substitution?
  2. How many players can produce this spring for LHB coach?
  3. LHB coach spring to be major revenue driver?
  4. Demand will be for new Super Fast trains and not replacement demand?
  5. How did the company get the product technology?
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Frontier springs Ltd uploaded its annual report on Saturday on its website and has very interesting updates on recent developments happening in the company and future growth prospects for the company

From the A.R

👉Frontier springs is the largest manufacturer of springs for LHB coaches in India and has market share of more then 80% for this springs,also till last year these springs were imported however due to make in india initiative these springs are now made in india which also reflected in there numbers and frontier spring is the biggest manufacturing company helping govt for import substitution of these springs

👉 As mentioned in A.R this year govt of india has decided to double the production of LHB coaches from 3000 units to 6000 units due to which company has big order book compared to last year(approx 50% -60% jump)

👉Govt has doubled the production of LHB coaches as it has decided to replace all old coaches with LHB coaches as they provide more safety more comfort higher speed and more space compared to old coaches

👉 Company is also in touch with Multinational company for manufacturing of Air springs by setting up a new unit which will help company to record big multifold jump in there topline and bottom line

👉Currently even this Air springs are imported and there are no manufacturers for this product due to this company is expecting MULTIFOLD jump in revenue in near future

👉 in current year company has also been approved by CLW/DLW/DMW for manufacturing of WAP7– WAP9 locomotive and even their production have been increased by more then 100% from 400-1000 by Indian railways

👉Also company has strong working capital management which is seen from their balance sheet that despite more then 50% jump in topline 89 cr from 58.7 cr and 100% jump in pat from 3.5 cr to 9 cr company has reduced debt from 12.5 cr to 8 cr and receivable have also been stable increased from 10 cr to 11.5 cr only this shows prudent working capital management by this company

👉For the current year also we @Dialwealth expect robust performance from the company giving the strong order book and jump in demand we expect Frontier to deliver minimum 120-125 Cr topline and PAT of 13-15 Cr on conservative basis company has also recently completed capex and stared one more line of production (from internal accruals) which will help them fulfil recent jump in demand

👉At current market price of 190 company has market cap of only 75 Cr and stock price can easily double in next 6-12 months and cross 52 week of 270 in next 3 months

Link to latest Annual report

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https://www.crisil.com/mnt/winshare/Ratings/RatingList/RatingDocs/Frontier_Springs_Limited_March_30_2019_RR.html
March 30 report of Crisil, issuer not cooperating. Whether this is a red flag.
Disclosure: not invested

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No. In my experience, many companies have “issuer not cooperating” rating and it often is that the company has not asked CRISIL to do any rating because the company does not need to raise debt.

Disclosure: not invested.

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When a company does not require fresh debt they don’t share information with credit rating agency nothing to worry

If someone is planning to attend AGM in Kanpur on 30th - Would appreciate if you try to get clarity on following -

  1. There are foreign travel expenses every year ( atleast last 3 years ) to the tune of 6-11 L / year and these are over and above the travelling expenses of 25-30L / yr . Are these travels part of compensation to management or are these business travels trying for some foreign tie up or something ?
  2. Who are the other competitors for the same product and what is the overall market size for existing products.
  3. There is 0 R&D expense in the company . Do they have any plans for any new products. About Air Spring they keep mentioning same stuff in every AR.
  4. Expansion in last 3 years to tune of ~13-14cr - what is this expansion for ? Also is the expansion on the same plant.
    There are 2 Land purchases in last 2 ARs - 57L & 68L from other promoter co - Frontier Industries- what these purchases are for ?
  5. What is the relation of Vishpa Rail Equipment with Co which had loan to company till this year. Also has 3% holding and does some business with them as well.
  6. What would be the dividend distribution policy going forward.
  7. What was the purpose of booking a residential flat in Unitech gurgaon shown in Non current Asset 31.5L - project is stalled now. Also what is the current status. Amount is small though but not sure of the intention of promoter here.

Few other points noted from AR -
2 directors - wife of MD & CFO have the exact salary and even the loans to the co from these 2 are almost same and earn same interest income.

Thanks

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Can someone share AGM Notes? That would be helpful…

Could not attend due to heavy rains had to return from midway however will be meeting them soon mostly post silent period

FSL posted 32% growth in revenue in Q2FY20. PBT moved by 45%. Good numbers. Waiting for your notes @Dialwealth Please do quiz the management on opportunity size and sustainability of earnings.

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Frontier Springs Q3FY20.pdf (2.5 MB)
Good show continues…Sales up 30%+, profit doubles Y-on-Y.

yes very good show how will company has maitain the same cost of Q2 and earn better margin with incremental rise in topline

The results are really good and I like the company. The only problem I see is how do we track this company as a core investment. Hardly any information available

I don’t see any conference calls as well. I just need to understand how do we find the details about their current Order book etc?

Disclaimer : I am currently invested in the company and pls do your research and make your own decisions

One big reason for selling this off, other than safety as small/micro-caps crashed, was LHB coaches have more air-springs/anti-roll bars and less springs compared to the ICF. If they can make-in-india what is imported from germany then there will be good demand for many years as conversion cycle from ICF to LHB will be quite long.

WAP7/WAG9 are the most powerful and best locos, they will replace everything else, with Mumbai made into AC from DC and electric traction for 100% network in few years.

LHB replacement started 3 years ago, majorly to stop accidents and casualties when accidents happen, since they are designed to be anti-telescopic, which means coaches do not climb/crush on one another when they crash/derail, they stay well-separated. Also, because LHB has much better ride quality esp. at high speeds so chances of derail are less. Further they are lighter which means less damage to tracks as they move, another cause of accidents. They are full stainless steel hence less maintenance. LHB have more capacity (5% longer) by 8% and better design overall, higher speed limit by 15/20 kmph. But ICF coaches have axle-mounted dynamos for electricity, ancient tech but railways is used to it. LHBs do not have dynamos, use EOG (end-on-generation, i.e. generator coaches, 1 working and 1 backup) and were designed originally, about 15 years ago, for only Rajdhani or Delux AC express. Now, since past 3-4 months, railways are using modified WAP7 locos with HOG (head-on-generation, i.e. draw electricity from overhead wire for supply to coaches) to eliminate 2 wasted coaches per LHB train. This is required for full-scale LHB use without wasting train-capacity (roughly 10%) and diesel/pollution.

2019 was the first year in railway history without a single casualty due to accidents.

Disc: 7% of portfolio.

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Full list of RDSO approved suppliers (Mechanical parts):

Frontier appears in 59 places and most places it is a big supplier, biggest at least of steel springs.
At 45 places, it is “Frontier Alloy steels” an associate concern.
“Frontier springs” only appears in 14 places.

For LHB air-springs/dampers they are not listed, not even as (under) development vendor, only for coil springs.

RDSO might not have control of the full list. Some parts may be delegated to the individual organizations manufacturing locos and coaches. I navigated to RDSO specific doc given above from this master page:
https://rdso.indianrailways.gov.in/works/view_section.jsp?lang=0&id=0,5,5674c

At left side of page, loco and coach factories are listed. ICF has nice search features, searching for “spring” gets this list:

RCF has Frontier only for LHB (“FIAT”) inner and outer springs but less than half of the qty of GB springs.

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