Considering the steep correction in the counter and an upcoming full season for the AC players, was looking into this business with strong interest. But going through the annual report in detail, some surprising points stood out at me which acted like anti thesis pointers. Would be good to have views on below points:-
- Page 35 Annual Report : The company does not enter into forward contracts to manage commodity price risk. It does hedge though for Forex. This is a business where material costs form 63-65% of total sales - I find it amazing that what seems like a good quality MNC does not safeguard the consistency of their margins and cash flows.
This is already playing out this year. The previous quarter margins have been massively impacted. In fact the already poor EBITDA for Dec 2021 would be in loss if not for the negative inventory number.
I also checked how the raw material costs have been managed versus Blue Star, Voltas. There is a massive difference, with the Indian companies suffering no where near the margin loss suffered by JCHAC.
- Page 81 Annual Report - For a 7-8% EBITDA business, the parent charges quite a heavy royalty. Royalty numbers for 20-21 have ranged between 1.6-1.9% of sales, which is ~30% of the operating margins in the usual scenario. In the current scenario, where they have not managed commodity risk well, it very well might be the entire EBITDA margin!
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@ankush12495 rightly points out above why this business having unfavourable economics and not generating cashflows. I agree, and am very surprised measures described above (especially commodity price hedging) are not implemented by a what seems to be top notch MNC parentage. I wish there were some conference calls where the management view could be gauged on this.
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Makes me think towards that pledge mentioned @babu44b in Jun’21. Could it be that this is a company where capital is not as well managed as you would expect in a good MNC. Why would they not borrow from the parent companies? It does seem that Johnson and Hitachi are not being too benevolent towards the India JV, whilst they continue to make good money through royalty.
Disclosure : Not invested, tracking. Not a registered advisor.