Modison LTD - Can the switchgear company switch fortunes?

[harsh.beria93]

AR23 notes:
Management change

• Kumar Jay Modi (son of Managing Director G.L Modi) became Jt Managing director
• Rakesh Singh (non-executive director) and Manish Srivastava (joint MD) resigned
• Murlidhar Narayan Nikam was appointed as CEO (very impressive profile; ex CG Power and Crompton Greaves)

Miscellaneous

• Losses on forex hedging: 2.56 cr. (vs 3.54 cr. in FY22)

• Inventory was 78.52 cr. in FY23

• # of employees : 261 (vs 257 in FY22)

• Increase in management salary: 12.57% (vs 10.78% in FY22). This was despite drop in profits by 27%

• Increase in other salary (except management): 11.17% (vs 8.39% in FY22)

• Share price : 49.55 (low), 81.15 (high)

• # shareholders : 15’736 (vs 17’182 in FY22). Dheeraj Kumar Lohia held 0.61% and is a new entrant in top 10 shareholder list

• Audit fees : 8.8 lakhs (vs 6.35 in FY22)

• Total tax disputes : 75 lakhs (vs 10.25 cr. in FY22). Seems 10 cr. tax dispute is close to being solved
  

  

• Doubtful receivables : 1.89 cr. (vs 1.4 cr. in FY22)
  

  
  
  
  

• Advances from customers: 7.72 cr. (vs 4.1 cr. in FY22)

• Other expenses breakup:

• Received Certificate of Appreciation from Siemens Energy and ABB- Supplier Summit Award 2022

• Our new flat organization structure enables streamlined decision-making and lowers transactional costs. We have also implemented a Reward & Recognition scheme to create an environment of Performance Excellence, which has started showing desired results and is expected to add significant value to our organization

• Since FY22 project of construction of Modison Government College is under progress

• Certifications: ISO9001:2015, ISO14001:2015, and 45001-2017

R&D projects

• R&D spends: 75.71 lakhs (vs 80.49 lakhs in FY22) capitalized, 43.23 lakhs (vs 55.3 lakhs in FY22) recurring (total: 1.19 cr. vs 1.36 cr. in FY22 )

Related party transaction with Modison Copper:

• Purchase: 26.25 cr. (vs 27.09 cr. in FY22)

• Sale: 1.69 cr. (vs 4.66 cr. in FY22)

• Took approval for transactions upto 50 cr.

Broad outlook

• During FY23, managed its growth in high voltage & continued momentum in terms of volume for low voltage.

• Adverse input cost movement including silver impacted profitability in short terms.

• FY24 focus will be on cost optimization & innovation that include new product development, automation, new market development

• Witnessing supplier consolidation and China+1 from key clients thereby having higher wallet share

• Engineering Goods sector constitutes >27%, accounting for largest share of India’s total exports. Growth in engineering goods exports in recent years has largely been due to the zero duty Export Promotion Capital Goods (EPCG) scheme

• India Switchgear market is expected to grow with a CAGR of more than 5% from FY23 to FY28. Low Voltage Switchgear market is formed by commercial, residential buildings, real estate industry, and construction sector.

• Medium and High Voltage Switchgear is expected to have stagnant growth during the forecast period 2023.

• Company’s HV competitors are from Europe it is imperative that Company remain in sync with the global manufacturing norms

• Has 2 plants in Western India (Vapi and Silvassa), employing more than 500 people

Capex plans

• Spent 12.5 cr. with most addition being seen in CWIP

• We have started our capex plan for upgradation of our existing facilities by infra expansion, both green and brown field, procuring automated machinery and robots etc. Started construction of new factory at existing premises and at new plot near existing factory. These will be commercialized in FY24.

Disclosure: Invested (position size here, no transactions in last-30 days)

[harsh.beria93]

I attended Modison’s AGM, sharing notes of the same.

1. Last year we had guided for sales of 500 cr. by FY25 and 1000 cr. by FY30. Given that FY23 didn’t see any sales growth, what is our sales target for FY25 and beyond?

2. Can you provide a sales breakup between HV and LV contact segments. In FY22, we did 250 cr. from LV and 80-90 cr. from HV. What was the nos in FY23?
249 cr. LV, 86 cr. HV

3. What was the volume growth in HV and LV segments in FY23?
HV: difficult to measure
LV: 1.5% volume growth

4. Given that companies like Shivalik Bimetals has also entered contact segment, how do we see competitive landscape changing?
Shivalik is mainly into thermo bimetals

5. Our samples were under approval for Polycab. Have we started supplying commercially to them?
Still discussing with them

6. With our current brownfield and greenfield expansions, how much capacity will we be adding in LV and HV segments?
LV: brownfield expansion in a plant near existing facility, melting facility shifted to new facility
Greenfield project for HV segment is under construction phase and will finish in FY24

7. We were trying to move into supplying entire assemblies to our big customers which would have contributed to our margins. How is that going?
8. In last 2 years, our margins have been adversely impacted due to sharp movement in silver prices and due to currency fluctuation. How are we addressing it?
PAT decline was due to silver price fluctuation. Performance improved in Q4FY23

9. We had started small supplies of silver salts to pharma and lifescience companies. How is that business doing?
10. Despite a large drop in our profits in FY23 (27% lower), why has management remuneration increased by 12.57%?
11. Can you talk about our R&D initiatives in nickel and other alloys?
Still finding partner

New market development

• Plants to enter new markets
• New business development

• Focusing on export growth

Disclosure: Invested (position size here, no transactions in last-30 days)

[Debojit_Kangsa_Banik]

@harsh.beria93

Adverse input cost movement including silver impacted profitability in short terms

Probably noob question, how will Silver price impact the business? How will the current silver price increase impact the company?

[vraokasturi1]

You seem to be closely tracking Modison. Any idea what happened to the mou from Nov 2021 with Renera & Lcharge?
There’s no news about it in any presentations after that

[harsh.beria93]

I attended Modison AGM, sharing notes below.

1. At the last AGM, we were expecting to reach 410 cr. in FY25 which we already accomplished in FY24 and we are now expecting to reach 475 cr. in FY25. Congratulations for the very good growth. Can you tell us what drew growth in FY24 and do we now envisage reaching 1000 cr. earlier than FY30?

Strong order pipeline, confident of reaching 1000 cr. target by FY30

2. In FY23, we did 249 cr. from LV and 86 cr. from HV. Can you provide a sales breakup between HV and LV contact segments in FY24.
312 cr. LV, 92 cr. HV in FY24. Expect this mix to be similar in future.
Additionally, working on product diversification

3. What was the volume growth in HV and LV segments in FY24?
10% LV volume growth
HV volume growth difficult to quantify

4. We have done well in export markets and have been mentioning opportunities from our large customers as part of China+1. We also see advances from customers increasing from 4.1 cr. in FY22 to 13.57 cr. in FY24. Can you tell us the potential of growth in export markets, and the Chinese competition?
Export growth 26%
Automation investments will decrease cost of operations and improve competitive abilities vs Chinese suppliers
Continuous expansion in exports
Good orders from export customers

5. We were trying to move into supplying entire assemblies to our big customers which would have contributed to our margins. How is that going?
May get some advantage in FY25

6. We were earlier discussing increasing our business with Polycab. Have we started supplying commercially to them?
Has been dropped

7. With our current brownfield and greenfield expansions, how much capacity will we be adding in LV and HV segments? And will they be enough for reaching 1000 cr. revenues?
8. When will our new capacities come onstream?
Greenfield is almost completed
Capex done in FY24 for growth in next 2-3 years

9. Can you talk about our R&D initiatives in nickel and other alloys?
Doing R&D to introduce import substitution products

Improved EBITDA margins despite huge volatility in silver prices

Disclosure: Invested (position size here, no transactions in last-30 days)

[SAM2003]

Q1 2025 results are out and do not meet the market’s expectations. No wonder this company is the market leader in HV/LV switchgear contacts and has been doing business for more than 60 years but has not developed a moat in business. Their business prospects are up/down due to commodity price fluctuations.
this quarter’s gross profit margin is less than 1%
Silver hedging loss 3.75 cr and profit 1.14 cr.
Invested and sold 50% holding after Q1 25 result.

[harsh.beria93]

In the last few quarters, Modison has been reporting very high sales growth (20-40%).

Additional, there are other metrics which also show very good scaleup.

1. Customer advances has been increasing continuously over years (FY22: 4.1 cr., FY23: 7.72 cr., FY24: 13.57 cr.).
2. An interesting insight from their recent rating report was their order book has now reached 100 cr. (vs 64 cr. in December 2023).

They also posted their highest ever quarterly PAT of 8 cr. in September 2024. This is in-line with their FY25 PAT guidance of ~30 cr. Earlier, they used to have significant hedging losses, which seem to have reduced over years (FY22: -3.54 cr., FY23: -2.56 cr., FY24: +5.59 cr.). Although, this number tends to be volatile. I am sharing my additional notes on Modison.

10.05.2024 interview

• Did 33 tons silver volumes in FY24 and expect 10-12% tonnage growth in FY25
• Their domestic switchgear customers are growing at 20-25%
• Solar energy annual silver demand is projected to be 2700 tons in 3-5 years
• Electric vehicle annual silver demand should be 70-80 tons initially and increase to 300 tons in 3-5 years
• Cadmium will be banned soon

30.12.2024 Care

• Long term bank facilities increased from 60 cr. to 90 cr.

• LV (including MV) & HV contributes 75% and 25% to revenues

• Contribution top five customers was 40-45% over last 3-years

• Top five suppliers accounted for 65-70% of purchases over last 3-years

• FY24 growth largely driven by LV segment

• Unexecuted order book of 100 cr. as on December 15, 2024

• Raw material: Silver, copper and tungsten with silver forming around 75-80% of raw material purchases

• Does not have a defined hedging policy

• 15% sales as exports and 10% purchases via imports

• 35% of inventory is currently hedged

• On an average it takes 30 days for LV contacts and six weeks for HV contacts to supply to customers.

• Operating cycle: 128 days (vs 134 days in FY23)

• Average maximum utilisation of fund-based limits and non-fund-based limits stood at ~86% and ~9% respectively for 12-months ended October 31, 2024

• Installed capacity of 250 thousand arcing contacts for HV and 33 tonnes per annum of LV contacts at its Vapi plant

Disclosure: Invested (no transactions in last-30 days)

[rohitbalakrish_]

Hi Harsh,
Thanks for your notes here. Have briefly worked on it long back, but not very updated.

Just a noob question - How much of this growth can be attributed to inventory gains owing to strong Silver prices in the last couple of years?

[harsh.beria93]

@rohitbalakrish_

Just a noob question - How much of this growth can be attributed to inventory gains owing to strong Silver prices in the last couple of years?

Hard to say, silver pices are up close to 35% in last year. Management in their May interview talked about 10-12% volume growth, so maybe a larger part of recent growth was driven by silver realizations.