Modison metals

Stock Opportunities
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MODISON METALS

THE COMPANY IS OPERATING IN A NICHE SPACE OF MAKING ELECTRICAL CONTACTS USED IN SWITCHGEARS. IT HAS THE EXPERTISE AND CAPACITY TO MAKE CONTACTS FOR LOW, MEDIUM AND HIGH VOLTAGE SWITCHGEARS USED IN FACTORIES, POWER PLANTS, HOMES, RAILWAYS ETC.

IT HAS THREE MANUFACTURING LOCATIONS AT MUMBAI, VAPI AND SILVASSA.

IT CATERS TO CLIENTS LIKE AREVA, ALSTOM. CROMPTON GREAVES, LARSEN, SIEMENS, ABB AND HAS BEEN APPROVED AS THE LONE SUPPLIER OF AREVAâS GAS INSULATED SWITCHGEARS. NOT SATISFIED WITH QUALITY OF CHINESE PRODUCTS, AREVAâS CHINA ARM ALSO SOURCES ITS NEEDS FROM MODISON METALS.

THE ELECTRICALS CONTACT BUSINESS IS CUSTOMER CENTRIC AND CONTACTS MANUFACTURED FOR ONE CLIENT WILL NOT SUIT OTHER CLIENTS

THE COMPANYâS MAIN STRENGTH LIES IN ITS ABILITY TO PROCESS RAW BILLETS AND SILVER POWDER AND COPPER INTO CONTACT MATERIAL. THIS NEEDS HIGHLY SKILLED AND TRAINED LABOUR, ALONG WITH THE LATEST EQUIPMENT. PLUS THE COMPANY DOES NOT KEEP ANY OF ITS POSITIONS FOR RAW MATERIALS OPEN AND HENCE IT IS IN A WAY HEDGED AGAINST RAW MATERIAL VOLATILITY.

FINANCIALS

CMP 37MARKET CAP 122 CRORES BOOK VALUE 18.76, PROMOTER HOLDING 52.46 %, NO PLEDGING, HNI, FI, OTHERS HOLD AROUND 25%, PUBLIC HOLDS AROUND 22.5 %

DEBT AS ON MARCH 2010 IS 9.96 CRORES AND CASH ON HAND IS 5.78 CRORES.

A LOOK AT THE LAST SIX QUARTERS

QTR

MARCH09

JUN 09

SEP 09

DEC 09

MAR 10

JUN 10

SALES

16.18

18.85

23.68

25.24

35.85

32

NP

1.77

1.92

1.92

3.18

4.79

3.16

LAST SIX YEARS

YEAR

05

06

07

08

09

10

SALES

42.36

59.73

92.77

117.78

85.69

103.63

NP

4.4

7.19

10.07

14.07

7.91

11.79

LOOKING AT THE ABOVE FIGURES GIVES THE IDEA ABOUT THE STRONG RESULTS THE COMPANY IS PUTTING UP AND NOW IT SEEMS ITS GROWTH HAS ENTERED THE HIGHER TRAJECTORY WITH GOOD MARGINS SINCE LAST THREE QUARTERS.

CONSERVATIVE ESTIMATES WOULD PUT THE SALES AT AROUND 120-130 CRORES AND NET PROFITS AROUND 15-18 CRORES GIVING AN EPS IN EXCESS OF 5 FOR FY 11.

POSITIVES:

1. COMPANY WITH GOOD BALANCE SHEET AND EFFICIENT PROMOTERS

2. VALUATIONS LOOK ATTRACTIVE , STOCK AVAILABLE AT A PE OF AROUND 7.6 (BASED ON CMP OF AROUND 38) ON EARNINGS OF AROUND 5 FOR FY 11.

3. COMPANY OPERATES IN A NICHE SECTOR

4. COMPANY SEEMS TO HAVE BUILT A GOOD REPUTATION FOR ITS BUSINESS LOOKING AT RECOGNITION IT HAS GAINED FROM INTERNATIONAL AND DOMESTIC ELECTRICAL COMPANIES.

NEGATIVES:

1. GROWTH LARGELY DEPENDENT ON SWITCHGEAR INDUSTRY AND HENCE ANY SLOWDOWN IN IT MAY AFFECT THE COMPANYâS GROWTH

2. DEPENDENCE ON A FEW CLIENTS FOR ITS BUSINESS (ALTHOUGH THE CLIENTS HAVE BEEN AROUND FOR A LONG TIME AND ARE REPUTED COMPANIES)

3. ALTHOUGH MOST OF RAW MATERIAL PRICE VOLATILITY IS PASS THROUGH IN NATURE, THERE IS A TIME LAG AND HENCE Q-ON-Q RESULTS MAY SHOW VARYING PROFIT MARGINS.

TECHNICALS.

THE STOCK RECENTLY BROKE OUT FROM A SHORT TERM TRIANGULAR CONSOLIDATION AT AROUND 30 LEVELS AND RALLIED TO POST A HIGH AROUND 42-43 AND IS CURRENTLY CONSOLIDATING AROUND 36-38 LEVELS.

1 Like
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Who are it’s competitors? It seems the company is supplying to nearly all the major players in the Indian electrical equipment manufacturing space.

Also, what is the addressable opportunity here. Are we going to see a lot of growth in this space even if we assume we get to 50% of the 12th 5year plan?

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CRISIL Equities assigns fundamental grade 3/5 to Modison Metal Limited

Modison Metal Ltd. (Modison) is a leading manufacturer of electrical contacts inIndia. Electrical contacts are used in switchgear to complete or interrupt electrical circuits and transfer electricity in virtually every electrical device. The demand for electrical contacts is dependent on the growth in the switchgear market. The industry is made up of low-, medium- and high-voltage electrical contacts. We assign Modison a fundamental grade ofa3/5a,indicating that its fundamentals areagoodarelative to other listed securities inIndia. We assign a valuation grade of**a4/5a,**indicating that the market price has a potential aupsidea.

Major domestic player in the electric contact industry

The industry is concentrated in nature, wherein the top few players hold the major market share. In the low-voltage segment, apart from Modison there are only two organised players - Hindustan Platinum and Choksi Heraeus. In the medium- and high-voltage segments, Modison is the sole Indian manufacturer but it faces competition from foreign companies likeAMIDoduco, Elecktro Metall and Louis Renner.

Investments in real estate, rural electrification and power infrastructure to drive demand

For low-voltage electrical contacts, the growth is likely to be triggered by: a) expected addition of 929 mn sq.ft. and 167 mn sq.ft. in residential and commercial space, respectively, in ten major Indian cities over the next two years, and b) the Indian governmentas plan to complete rural electrification by 2012. For medium- and high-voltage electrical contacts, growth will be driven by expected investment of Rs 3.4 tn in transmission and distribution infrastructure during FY10-15.

Low price-low quality Chinese products have a market, albeit a limited one

Modison is facing competition from Chinese players in the price-conscious, low-quality segment. While some of the low-voltage electrical contacts are being supplied at a price equivalent to Modisonas raw material cost, relatively better quality of Modisonas products gives it an edge. In the medium- and high-voltage segments, the unorganised Indian players are importing complete switchgear assemblies fromChina, killing the domestic demand for electric contacts. But due to the inferior lineament, quality-conscious customers refrain from using their products.

Growth backed by robust order book

Modisonas prospects look promising due to the growing size of its order book. The companyas order book is in the range of Rs 200 mn to Rs 250 mn as of July 2010 compared to Rs130 mn as of December 2009. Although the order book is executable in a couple of months, it is indicative of strong demand in the underlying switchgear market, improving international scenario and Modisonas increased presence in the international arena.

Revenues to grow at a CAGR of 22%, EBITDA margin to decline

We expect revenues to grow at a CAGR of 22% to Rs 1,432 mn in FY12 from Rs 967 mn in FY10. EBITDA margins are expected to decline to 21% in FY11 from 23% in FY10 due to an increase in raw material prices. Adjusted EPS is expected to increase to Rs 5.1 in FY12 from Rs 3.6 in FY10.

Valuations: Upside from current levels

We have used the discounted cash flow method to value Modison. We have projected cash flows from FY11 to FY15, assumed cost of equity of 15% and terminal growth rate of 3%. Based on this method, we arrive at a fair value of Rs 44 per share. We initiate coverage on Modison with a valuation grade of 4/5, indicating a potential aupsidea from the current levels of Rs 37 (August 31, 2010).

You can get the full report by registering with CRISIL here

http://www.crisil.com/research/research-ier-download.jsp

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inIndia. ofa3/5a,indicating areagoodarelative inIndia. of**a4/5a,**indicating

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governmentas

** Low one **

Modisonas Modisonas fromChina,

** Growth

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**

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** Revenues decline **

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aupsidea

http://www.crisil.com/research/research-ier-download.jsp Link: http://www.crisil.com/research/research-ier-download.jsp

I went through the report and feel their earnings forecast are a bit conservative. I expect the company to register EPS of around 4.8 to 5.2 for FY 11. Although I might be considered an optimist here because I am invested here, but looking at the last few quarters and orders the company is getting, the above estimates are possible. And since the company does not have any listed competitors, there is a good chance of it getting a good rerating.

Currently it is in trade to trade segment and hence there might not be too much movement along with the markets, but for those convinced about the story, this situation offers a good chance for accumulation.

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Hi Hitesh,

I looked at the CRISIL report at length. here are my quick observations:

1). There is some seasonality in Sales. Q1 & Q2 are subdued, with Q3 & Q4 accelerating if one were to go by FY10. Assuming the trend persists in FY11, they possibly can do 130-135 cr in Sales. if they maintain Q1 rate, then they do ~120 Cr

2). 60% of Sales come from the highly competitive low-voltage segment. RM constitutes 65% of FY10 Sales. Add to this the raw material price increases and lesser ability to pass on increases, margins will be under pressure. Op margins may come down say to 21% from (~23%) and Net Margins from 12% to 11% say.

3). With 130 Cr Sales and a 11% NPM, EPS is around ~4.4

So I sort of agree with CRISIL estimates…its better to be conservative. However if there is a big surprise in Q2 results (which there is a possibility because of the healthy orderbook), one would revise estimates.

At current valuations, this is not compelling for me. You might have got in much earlier at better valuations?

Donald

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I had a question. I want to understand why CRISIL has used Discounted cash Flow (DCF) methodology to project cash flows for 5 years for such a small company.

I have read elsewhere in this site, that DCF is a useful tool only where there is great stability and predictability in cash flows. I looked atModison Metals Cash Flows over last 5 years here. It must be said that except for FY10, the Op Cash flows have been growing steadily…but a big drop in FY10 from 21 Cr to 7 Cr.

I am intrigued by CRISIL’s choice. Is this that predictable a business? If it is, then there may be more sense to look at Modison more closely.

Please comment

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Modison Metals Management Q&A, Mar 31, 2011(requires login)

It was good interacting with Modison Metals VP Finance Ramesh Kothari - he speaks less - but he answered all questions that we posed to him.

The company has 60% markets hare in LV contacts, and faces no competition in domestic market for MV & HV contacts as imports are not viable due to lead times involved.

Company seems well poised to grow at 15-20% for the next few years. They seem not to be affected much by commodity price volatility - contacts are just 3% of total switchgear costs). Infact they are seeing better margins in a rising prices scenario as seen in the last 2 quarters (bought at lower levels, billing at price of the day). They might have some flexibility in pricing strategy I guess as 50% of raw material (semi finished goods) are procured form group companies -this was not accepted or denied, btw. They maintain they may face pressures if prices suddenly decline.

When the power T&D investment and execution improves in the country, Modison Metals should be a direct beneficiary and a proxy play.

Invite your comments

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Modison Weekly Chart:


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Thanks donald for the good work.

positives emerging from the notes are:

Company has a fair share of market share in its niche.

Fears of diversification seem to be overdone.

Low chances of raw material price risks.

Looking at the bigger picture, it seems difficult to see how the company can show scorching growth which some other small companies which we track are more likely to show.

I think we might be better off sticking to balaji amines, balkrishna inds, mayur etc which look likely to keep the growth momentum intact going forward.

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Hi Donald,

What do u think about his answer to Related party transactionquestion?I think he hardly said anything on that.

Regards,

YSB

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Not much was expected either. this is a fact of life for smaller companies. What he did say also was that the promoter companies were only into semi-finished metal. they were not in any position to manufacture contacts (read as no risk of orders diversion to them, etc.)

Rgds

Donald

transactionquestion?I

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Thanks Hitesh for the summary. This is more like a steady 15% grower, I agree. There is potential though for bigger growth when T&D situation of private players improves. Also need to verify some of their claims of zero competition in MV & HV contacts…if that’s true, there is a story in the making. OPM here is upwards of 25%, remember. I like the fact that their debt has progressively been coming down. Their debtor days is some 38 days in 1H. Inventory days is higher only because of Silver going up! Going by 1H, they should be back to high returns 30% +ROCE in FY11. Looks to be decent business in the hands of able management.

FY11 EPS looks to be in the range of 4.6 or so, so its available at some 6.5x at CMP. For it to be compelling valuations have to be cheaper, for me. But we should put this company on our watchlist, and keep tracking developments.

-Donald

** Looking

** show.I **

forward.

**

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One thing we need to closely watch out for is the FAIRY TALE stories handed out by corrupt press.I take stories appearing in Forbes India( belongs to CNBC group),Business India with pinch of salt.

Patel Engg is one such worst co who had comeout withan inflated IPO priced at 440 in 2006 but you keep reading n watching fairy tale stories appearing in press & the price has now fallen to 140 rs.Gitanjali gems,Hanung Toys,Lakshmi Energy,Koutons,Bartronics,Ramky Infra ,CEBBCO the list is endless.

Let the nos do the talking.All top management are very eloquent people m hence risen to top.They are good story tellers.

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Has anybody tracked the record of CRISIL research reports.

AS per my initila impression all their recommended scrips LIke Everest Kanto ,Infinite Computers & Modison has performed very badly after their research report n buy recommendation.

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I agree with you on questionable track record of reports from rating agencies like CRISIL. However we should treat all broker reports as also CRISIL Reports only as additional information base. We cannot and should not rely on their valuation calls.

Our valuation calls need to be independent and based on our homework, the quality of our research and therefore the conviction we have on the stock. Seen that way, I welcome all published information on a company -Bussiness India, Forbes, CRISIL or a Management Interview for that matter. It is for us to have the maturity/sense to separate the fluff form the facts, isn’t it.

We also need to independently verify the claims of Management. So Modison claims of no competition in MV & HV electrical contacts segment and a 60% market share in LV segment should be tried to be cross verified. Any contacts in L&T, Areva switchgear divisions?

-Donald

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Hi,

Is there anyone who is still tracking this company ? I believe with new infrastructure for Power Sector push by the government this company is having a tailwind in fact the entire sector is. Just like we have seen for Apar Industry in last couple of month. I have few question to start of:-

  1. Is this company having a strong brand like APAR ?
  2. If the claim from the management is correct that they are having no competitor in HV & LV segment then why it has only grow for last 3 year is only 1.8% ?
  3. What is there business model since I don’t get any insights from the AR?

If any one can provide any starting reference point then I can dig much deeper since I only have AR and below VP link for my reference.

http://www.valuepickr.com/q-and-a/modison-metals-management-qa-mar-2011/

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The stock is on the verge of making a multiyear / lifetime breakout…very bullish technical…on all time frames…long term, medium term and short term

MODISON MET
MODISON MET1364×739 70.1 KB

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Any views of the company products and management----------------

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L&T segment analysis and modison is a sure beneficiary of their growth because l&t is their main customer

We will now go to the Electrical & Automation segment on Slide #20. This segment as you know is essentially dealing with low voltage switchgear and to some extent medium voltage switchgear as well. Here, Q3 has seen a smart growth of 20% as far as revenues are concerned and what we have witnessed in this particular segment is that they have seen growth both from industrial offtake, offtake from the building segment, offtake from agriculture segment as well as from rural electrification segment where our meters typically go. So, there has been an all-round growth in Q3 and that has led to 20% growth in Q3 and 16% for 9 months as a whole. The margin has also improved slightly and this particular business has put in place a structural program of operational efficiencies and those are seeing improved realizations.

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Hi,

Earlier this year Modison Metals has declared joint venture:

Modison Metals Ltd board approves forming JV for tungsten metal products.

Anyone having idea how this JV will help Modison metal?

Thanks,
Deb