A recent purchase in my PF has been Schaeffler India. I had posted its chart on 52 weeks high strategy thread. Stock price had broken out of its all time high of 6000 and was consolidating then around 6500 plus or minus levels. Since then it has gradually moved up to post a high of around 7600 and is currently poised around 7200-7350 levels.
Fundamentally its a leader in bearings supplying to auto, non auto and after market sales. One of the most interesting things for me has been the growing exports. According to some scuttlebutt I had with an employee, the parent has reduced/stopped production of ball bearings and most of that is likely to be outsourced to India. A confirmation of the above fact comes from management commentary after June quarter results wherein they mention that exports are picking up and company expects good growth in exports going forward.
A capex of nearly 1000 crores is on the anvil and company seems to be loaded with orders. Management focus remains on improving margins along with growth in revenues.
With revival in auto sector specifically CV, tractors etc and general economy, Schaeffler is likely to see good growth going ahead. Last three quarter sales have been in range of 1250-1350 crores and net profits have been in the range of 130-140 crores. Quarterly eps range has been 40-45 per share.
Techno funda picture seems interesting. disc: invested as disclosed in other thread.
Auto sector revival seems far fetched at this moment. Its evident from all the OEM management commentary combined with chip shortage issue. If you read Sundaram Fastner management interview recently she mentioned that CHIP shortage issue will be there for next 2 years at least and whatever capacity is there, its been diverted other high growth industry such as mobile phone manufacturing etc.
Bearings are high life components and replacement cost as well as the total contribution in a vehicle / machinery is around below 1 to 1.5% there are various leaders in various niche bearings and has fare share of all like timken skf NRB IMHO fundamentally this is susceptible to cost of chromium nickel , tungsten and other metal which had run a lot so the upside may be there but fundamentally the margin will be thin ā¦
the replacement of these may be either on failure or during the preventive maintenance ā¦ The plants as well the vehicle owners are very much conservative to pay the price unless it is specially for very high risk area such as aviation or critical applications I may be wrong in my perception
regards
Dear Hitesh bhai
May I ask your personal views on the outlook for Tyre industry in India , and your specific input on JK Tyre if any, both from fundamental and technical perspective.
My question in 2 parts :-
With regular announcements and good execution on strengthening of road highways/ expressways, the penetration and density of both passenger and commercial vehicles is bound to increase. If Mumbai-Delhi 12 hours, and Mum-Ahmedabad or Mum-Nagpur 6 hours ā¦ and so many likewise routes, then will India soon become a road-travel country like the US ?
2a) JK Tyre much lags in market cap compared to its peers Ceat, Apollo . The group ranks well on governance with companies like JK Paper, Fenner under its belt. If management walks the talk on de-leveraging of balance sheet, then can it catch up on market cap with Apollo tyres ?
2b) On charts, JK Tyre is slowly creeping towards its ATH of 185 levels with a good round bottom pattern as per me. Can you please assess and share your technical view on JK Tyre ?
I think we have a market where there is continuous sector rotation, and one or the other sector keeps popping up. So in line with that, tyre companies too will be in the limelight. But thinking that with improvement of roads, a lot more vehicles are starting to run on highways etc might be partially true, but it might take a long long time to play out.
The charts of most tyre companies seem to be good and one can pick and choose. Whenever they move they will move in tandem. So one can play a basket approach. The only worry I feel is the increased input costs due to rising raw material and power costs.
In current market, there is strong sector rotation and if one is inclined to play these sectors, it needs careful watching. One has to keep an eye on stocks from a particular sector breaking out and then try to find few best companies from the sector and try to play that. In the past few months this has worked very well for me. It might not be everyoneās cup of tea but for someone who can be nimble and is observant, this could work well. Look out for tight consolidation for a few weeks and then a breakout and then either buy on breakout or on pullback.
For those who want compounders, there are a lot of high quality companies like nestle, 3m, etc which are undergoing strong consolidations and one can consider these.
Hitesh sir, Any views on CAMS as now it has corrected from around 4000 to 3000 and is having deopoly in Mutual fund and KYC Registation business having around 70 percent Market shares. Pl.
Will be helpful if you share your insights on SEPs ( systematic equity plans ), what factors should be considered while investing in a stock through monthly mode and which are the best stocks that can be considered for SEPs for long termā¦
Holding companies will do well only if the investee companies will do well. The kind of discount these holding companies get varies with different companies and triggers within and sometimes with market phases. There are differing views wherein a lot of people believe that instead of buying holding cos it might be a better idea to buy the underlying companies and forget about holdco discounts and its vagaries. Other view of course is the value investorsā view where they feel that they are getting stuff much cheaper. There are no absolute rights or wrongs about these.
The only place where buying holding cos makes sense is situations like M&A where the underlying company is likely to be sold off and in such situations, holdco discounts gap closes up fast.
Discipline is the foremost factor while buying stocks in SEP mode. There can be many ups and downs but we have to have high conviction in these picks and continue to buy in a disciplined manner.
The other important factor is to have a long term plan in buying these. If I am buying a bunch of stocks in SEP manner for next 10 years and have a mindset consistent with SEP, then its better to stagger the purchases over 2-3 years and then keep holding them.
Picking stocks for SEP is relatively easy. Idea should be to buy sector leaders with good moats in their business and which have longetivity in terms of growth runway. Plus the vulnerability to disruptions should be low in that particular business. A short cut to find these businesses is to look at the coffee can type of portfolios of guys like saurabh mukherjea or someone else doing that stuff.
My list would go like HDFC, Asian Paints, Pidilite, TCS/Infy/HCL tec, 3 M , Shree cem, Hind Unilever, Havells, One of good private banks, (HDFC bk or kotak bk or ICICI or Axis), Bajaj fin, etc. You can pick and choose and make a list of 10-15 businesses for this purpose.
Real estate sector has been one of the outperformers in the latest phase of market rally. And I think since most of these stocks have broken out of multi year highs, the outperformance is likely to continue. If one does not want to go through the headache of picking stocks, then a basket approach can be taken.
Hiteshji, I see you like 3M India as a business and also as an investment. I remember you had mentioned technical aspect also about consolidation etc. I thought it was more of a techno-funda momentum pick but good to see it in the coffee can list as well.
No doubt it is a unique company in every aspect. I am amazed with the variety of industries it touches and able to innovate in each, although my personal introduction happened to 3M via Post It first and later on via Scotch Brite as its range increased gradually in India. I was late to notice Scotch Brite dominance and innovation.
My query on this company is - Which industry/industries/products are the ones that drives its topline and bottomlineā¦its hard to find out and predict. I think they have internal targets at global 3M to keep changing around 30% of their revenue from new products every 5 years!
Above looks good, and certainly provides resilience to business, but such an innovative company has no significant product during the entire pandemic so far. I am aware they sell best masks/protective gears but their distribution and mass market reach during the pandemic left lot to be desiredā¦I maybe wrong hereā¦
On positive side, it could be that their new launches/distribution etc. are more aligned to global and predefined winning strategies that have stood the test of timeā¦but overall I would have expected lot more for the mass market from one of the most innovative company in India/world.
If I compare on the innovation & nimbleness, some homegrown FMCG seemed to fare much better than this global giant! Why is that so ā¦is it because product creation and innovation not so easy in the areas 3M operates?
Would be great to know your thoughts!
Disc: Have small position in portfolio from lower levels. Not a buy/sell recommendation. Post for academic purpose only
The one characteristic that defines 3M is innovation. It is a company which continues to innovate and continues to develop products that bring out new categories. If you remember, Post IT was a totally new concept product when it came about. Same thing with a lot of other products from the company.
I think as far as I know, automobiles still contributes a major chunk to total revenues. But with newer and newer products coming around every few quarters/years, this company will have an exceedingly long runway for growth. And hence it commands the kind of valuations it does.
Agree about some FMCG companies being equally innovative in terms of new product launches and creating new unheard of categories. But the canvas for 3M is much wider than these FMCG companies.
Anyone wanting to research this company should read the AR, go through product list and then try to make a call on the company.
Technically it seems to be trying to come out of long consolidation, largely sideways in nature. For guys who want to buy for long term, this kind of opportunity is a great one. disc: I dont yet own it, being more focussed on breakout stocks and those with strong momentum.
Do you have any views on a relatively young company with first and second generation entrepreneurs - Clean Science & Technology? The company got listed recently and is in the speciality chemicals business. They have a decent track record and good financial performance for the past few years. Their valuations seem to be in-line with other good companies in the sector. Would like to get your views on their business model and margins sustainability. They seem to be a family owned business and with very little known about them in the public domain, would like to know if itās worth considering for investments. Thank you
Hello Hiteshbhai,
Appreciate you for sharing knowledge. Thanks.
Whatās your view on SEP or SIP on blue-chip like Asian Paints etc. vs index fund (Nifty 50 and Nifty Next)? Either one is ok or individual stock has any adv our index?
The current mad bull run in the chemicals sector has taken a lot of company valuations to stratospheric levels. Nobody questions the kind of 80-100 PE valuations to these companies. Makes my head spin. Few quarters back there were no takers for even reasonably good companies with decent track records in chemicals space. And now the situation is exactly reverse. Everyone is running around to buy the next big chemical stock without bothering to check any kind of valuation logic.
Coming to Clean science and technology, the market cap as per screener is 22000 crores. Company has quarterly sales run rate of 150 crores and net profit of 55 crores. Thats a net profit margin of more than 35%. I dont know how long these kind of margins are sustainable. Besides this, if I annualise this 55 crores net profit, I get annual net profit of 220 crores which gives a valuation of 100 PE for this company. Say this company doubles its net profits in fy 23, then also its at 1 year forward PE of 50.
And with these kind of chemical type of businesses its difficult to predict how things are going to play out in next 2-3 years. When the prices are going up, most businesses have an aura of invincibility about them. We have seen similar things happen in pharma back in 2015 and NBFC back in 2018. And then something comes up to prick the bubble. And then all hell breaks loose and there is nobody to buy.
The other side of the argument could be about the quality of the business and runway for growth and so on and so forth. But we have to keep an eye on the kind of valuations we pay for these businesses. I personally do not want to run after these kind of opportunities. Instead I feel even a large cap like Hero Honda offers a much more higher margin of safety and probably over next 2-3 years prospects of decent returns from hereon. (this is just an example and no recommendation from my side. As of now I dont own Hero honda, but its in my watchlist and hence came readily to mind. )
Even after all these arguments, if Clean science continues to outperform and keeps going up, I would be able to live with it .
@hitesh2710
Thank you for your insights. I guess this is the dilemma everyone is facing as most of the companies (not just in chemicals space) have a trailing PE of 50 to 100 plus easily. I guess the rebound after a deep fall in markets always takes it to greater highs without any concern towards valuations. And there are many profitable businesses which are not trading at such high valuations. Bit of a weird market out there.
The only reason I was interested in Clean Science (among so many IPOs and other companies in the sector) is the good set of financial metrics. Their management clearly mentioned that this is peak margin and canāt expect margins to go up further but they will do everything to maintain margins at current levels moving forward. Another reason is their capex. Their total production volumes should more than double current capacity over the next two years. If they can increase sales matching their production capabilities and also maintain margins, then perhaps the valuations are sustainable (There are few companies like Vinati etc that could sustain high valuations for a few years now).
Few quarters back there were no takers for even reasonably good companies with decent track records in chemicals space. And now the situation is exactly reverse. Everyone is running around to buy the next big chemical stock without bothering to check any kind of valuation logic.