Permanent Magnets - Business under transformation?

[phreakv6]

The business was incorporated in 1960 and has been around for decades. They were primarily into magnets and magnetic assemblies for a bulk of their existence (until 2005). When the energy meter technology changed, it led to a downturn in the magnets business, as reflected in the Annual PnL from FY08 to FY17 or so.

Since then the business has re-invented itself, especially post FY15 when the revenue mix shifted from magnets to Shunts and Hi-Perm.

Technology obsolescence is a clear risk in PML’s business as it happened in 2005 and also again with the Gas meters business in the recent past. To counter this, the business is focusing more on capabilities than specific products.

It is this specific change that is paying rich dividends to the company.

Now they have capabilities in metallurgy, mechanical, electrical and electronics engineering, along with melting, casting and heat treatment. This allows them to be the go-between for pure research and design companies and end-use industries to manufacture the product required that meets the specifications. They do customer-specific design prototyping and simulation (in collaboration with magLab).

PML is one of the partners for magLab and an important one in the ecosystem. It looks like magLab does design & research, NM offers numerical modeling and simulations (testing materials for their electrical and thermal properties, without actually trying out lot of combinations), Melexis offers semi-conductors, sensors and industry knowhow and PML implements the solutions designed in collaboration with magLab and also supplies them at volumes.

Source: https://www.maglab.ch/partners/

The corporate presentation of magLab as well lists themselves as PML’s design partner and exclusive representative (clearly PML’s fortunes are tied to magLab and Melexis) - Slides 3,4,5 and 10 substantiate.

Melexis AR has lot of very useful info (It is a 3.36 billion EUR mcap business based out of Belgium). magLab and PML are crucial partners for Melexis as can be seen from this snippet.

Coming back to PML, the capabilities above tie into these platforms for which they have several products (~350 SKUs)

Source: https://www.bseindia.com/xml-data/corpfiling/AttachHis/96f94f2a-43b1-4024-8e09-0aafe0bc628f.pdf

Slides 9, 10 and 11 show the critical products in Automotive and Energy meters, as well their products in alloys and die-casting.

There is another interesting thing to note as well, which is the sales composition and the trends. Gas meters contribution is going down from 18% to 6% from FY20-FY22 (19 Cr to 8Cr) which sort of masks the actual growth in Automotive sector 21 Cr to 33 Cr, almost 50% growth and in TTM sales this is very likely to have grown further.

So the business reinventing itself and growing in a fast-growing segment with good technology partnerships is a great sign. What’s even greater is this

They are very likely at present in Stage 1 or stage 2 products but are working towards Stage 3 and Stage 4 products. After digging around a bit on magLab, my guess is that these are the stage 3 and stage 4 products they are talking about in the presentation.

https://www.maglab.ch/wp-content/uploads/2020/01/20200115_IoTCurrentVoltageSensor_rev005.pdf

https://www.maglab.ch/wp-content/uploads/2020/01/20190320_BatterySensingMonitoringSystem2.0_rev004.pdf

https://cdn.shopify.com/s/files/1/0309/7625/files/CO-4-1.2-30-L.pdf?4839681362350308133

This could imply that the margins of the business could trend up if they find growth in these new products (Most have been conceived in FY20 going by the dates). They are also strategically integrating their manufacturing facilities under 1 roof which could also be margin accretive in the long run.

The PML FY22 AR is a very, very good read and has a lot of details on how the management is seeing the business prospects and is worth a read.

I noticed also that PML and magLab appear to have had a stall at Auto EV Expo this month in Bangalore. If anyone had been to it, would appreciate inputs.

Valuation: At 27x P/E and 17x EV/EBITDA, it is not cheap, however the business looks to be having good prospects but I doubt if any margin of safety exists at these prices around 700 levels. Around 550-600 levels, it could be a good buy though, if it gets there.

Risks

1. Technology obsolescence is very high
2. The contract payouts are almost 10% of revenue and could be the cost of manufacturing the shunts as they don’t appear to be manufacturing them in-house. Unsure how this will trend and who has the pricing power (Shivalik bi-metal could be manufacturing these shunts)
3. Valuation isn’t cheap anymore. (It is discovered even by idiots like me due to the flashy AR and Presentation)
4. Very highly illiquid stock - Please exercise a lot of caution executing trades here
5. Promoter stake has gone down from 70% to 58%

Disc: Invested from around 550 levels. Not SEBI registered and very much a novice. Please research on your own. The above is more or less a copy/paste from my notes with some clean-up and tweaks. Thought a thread would help bring in more perspectives since the existing thread is locked.

[akash8844]

Great Analysis👍

Couple of points I want to add here:

Promoters stake reduction is due to reclassification of certain promoters to public category and also selling by some non-executive members of promoter group. In fact active members like MD of the company Sharad Taparia are constantly increasing their stake.

2nd, don’t know about current capacity utilisation but the company is undertaking big capex. Property, plants, equipments have almost doubled in this half year

Valuations don’t seem to be as streched given the sectoral tailwinds and capacity increase lined up. Let’s track how the business unfolds🤞

Disclaimer: Invested & biased

[rupeshtatiya]

AGM22

• Energy meter faced headwinds due to semiconductor shortages

• Moving from component supplier to module manufacturer, this will increase ASP multifold

• Exploring projects in shunt and soft magnet category

• Automotive - 25% of revenue

  • Have pipeline of 200 projects - some are in r&d stage and some are in prototyping stage. 200 projects are across all segments, not specific to automotive.

  • Some of the projects can turn out big - depends on customer winning and end OEM approving

  • 25% sales from auto in FY22

  • Can do 100cr topline in 3-4 years from auto segment

  • Current sensing - customer does not like to keep multiple suppliers due to sensitivity

  • 50-60% revenue - from products where we are sole suppliers

  • In touch with tier 1 suppliers and end design companies in auto companies

  • 80% sales will be EV, 20% revenue from speedometer/ICE

  • Supplying to Mahindra. Currently buying whole kit through imports.

• Smart Meters - 38% of revenue

  • Domestic demand of meters is slow due to semiconductor shortages

  • Export market has lesser semiconductor shortage compared to domestic market

  • Low margin to supply to domestic smart meter manufacturers

• Module Manufacturing

  • Two projects in commercialization

  • Large commercial supply from modules has not started

  • Module manufacturing is primarily towards automotive segment

• Gas meters

  • No new orders for gas segment from Itron

  • Working on developing gas meter product with another customer

• Top 10 customers - 51% of sales

• Capex

  • Land acquisition to finish in 3-6 months. Capex to finish in 2 years from now.

  • No capacity constraints

• Paying 25L per month rent

• Borivali property - stuck up - discussion with builder ongoing. 1.25L sqft. 15% share.

• Margins low in Q1 due to product mix

• 20-25% growth guidance in FY23. Can get to 200cr revenue in next 2 years.

• Added 5-6 new customers

• CT business is growing

• Medical customer - expect revenue from FY24/FY25

• Hi-perm - 50%, shunts - 30%, assemblies - 20%

• Pricing is on Design - RM + value addition

• Back to back - RM booking.

• 80% business is from sensing, 20% from alloys/castings

• MagLab

  • They own design, PML manufactures

• Supplies to china and france - EV supplies

• Generally customers give forcast for the whole year

• EV charging - working on one enquiry

[Hrusikesh]

Another thing to note is the trade receivables: based on the balance sheet as of 30-Sep-2022, it has gone up by 30% to Rs46 crores since 31-Mar-2022. Sometimes this is the result of companies stuffing the channels to show higher sales.

Disclosure: No position

[phreakv6]

@phreakv6

I noticed also that PML and magLab appear to have had a stall at Auto EV Expo this month in Bangalore. If anyone had been to it, would appreciate inputs.

Found some info on products that were showcased by PML at the Auto EV expo.

Exploring the Range of Products from Permanent Magnets Ltd. - Times EV

[ayushmit]

Thanks for sharing, interesting and useful. Good to see them showcasing so many products

[Marathondreams]

PML Corporate Film

Permanent Magnets Limited Corporate Film

As per this film, Tesla is one of their customer.

[phreakv6]

Pretty good quarter on all fronts except gross margins but that I think could be due to product mix.

https://www.bseindia.com/xml-data/corpfiling/AttachLive/6ecd237e-1ee0-4ef3-9ca1-7ff0af4895c8.pdf

@Marathondreams

As per this film, Tesla is one of their customer.

They supply to Pegatron Technology in Texas which is a parts supplier for Tesla (they put up plant in '21) as seen below

@rupeshtatiya

• No new orders for gas segment from Itron

They seem to have resumed supplies to Itron for gas meters as well as electricity meters as per data above.

[Gaurav_Agarwal]

I believe the below article explains the massive jump in revenue as well as profit for the company in q3fy23. Important points to note from the article are -

1. As 2022 came to an end, China’s subsidy for pure battery EVs had the biggest drop since 2019, declining to nil from Yuan 12,600/unit. This was more than double the reduction of Yuan 5,400/unit in 2022 and Yuan 4,500/unit in 2021.

2. “A lot of EV demand has been brought forward, so I think the first half of 2023 will not look good,” said a source from a China-based lithium converter.

3. “There might be a deceleration in demand due to the end of Chinese subsidies for EVs, but not a decrease – deceleration and decrease are different things,” the producer added.

4. Similar to China, state subsidies in Germany for plug-in hybrids expired at the end of 2022, and those for purely battery-electric passenger cars were reduced. But Germany’s new electric car registrations increased 114% in December 2022 compared to December 2021, reaching a new monthly record of 174,200 units, according to the German Association of the Automotive Industry, or VDA. The record shows future EV purchases were brought forward, the VDA said.

5. Despite the several risks for EV sales growth in 2023, the long-term shift away from internal combustion engine vehicles remain unaffected. S&P Global Mobility projects that the share of battery electric vehicles, plug-in hybrid electric vehicles and fuel-cell electric vehicles in new light vehicle sales in Europe, mainland China and the US will rise to 70%, 49%, and 47% in 2030, respectively, from an estimated 19%, 18% and 8% in 2022.

EV sales momentum to face challenges in 2023, but long-term expectations...

Disclosure - Not Invested.

[Rushabh_Doshi]

@phreakv6

The contract payouts are almost 10% of revenue and could be the cost of manufacturing the shunts as they don’t appear to be manufacturing them in-house. Unsure how this will trend and who has the pricing power (Shivalik bi-metal could be manufacturing these shunts)

13. Can potentially forward integrate into Current Sensing modules from Shunt Resistors. This is the natural progression. These products are already under the works.
    From Shivalik Bimetals AGM Notes link

[Gaurav_Agarwal]

@Gaurav_Agarwal

state subsidies in Germany for plug-in hybrids expired at the end of 2022, and those for purely battery-electric passenger cars were reduced.

The below article confirms this. Mind you this about Germany only. The main points are as follows -

1. it expects sales of about 510,000 battery electric vehicles in 2023, eight percent more than last year; and sales of about 250,000 plug-in hybrid cars, a drop of 30 percent compared to 2022.

2. On balance, total EV sales will fall by eight percent this year,

Electric car sales plummet in Germany following subsidy cut

@Gaurav_Agarwal

As 2022 came to an end, China’s subsidy for pure battery EVs had the biggest drop since 2019, declining to nil from Yuan 12,600/unit.

The below article confirms this. This is only for China. The main point of the article is -

1. Sales of new energy cars that include pure battery EVs and plug-in hybrids also fell 6.3% in January after a blistering 90% growth in 2022, the China Passenger Car Association (CPCA) said.

https://www.reuters.com/business/autos-transportation/china-car-sales-plunge-38-january-subsidies-tax-cut-end-2023-02-08/

[Gaurav_Agarwal]

A small sale by one of the promoters. I tried but could find any relation between Managing Director Mr. Sharad Taparia and sellers Smt. KamalaDevi Taparia.

[calm]

MICRO CAP EV THEME SHARE 🤫 PERMANENT MAGNETS SHARE 🤯

[desaidhwanil]

Thanks @phreakv6 for starting the thread and very good write up on PML. I would like to add few more points that came to my attention and I feel are relevant from investment thesis perspective.

Metering:

• PML has been supplier to the metering companies for long time (more than 20 years), however they were supplying parts to these companies on mechanical meters which over time got obsolete. However PML navigated the transition from mechanical to electro-mechanical meters quite well by staying ahead of the curve and developing relevant products for this technology transition.

• PML has been a supplier to some of the largest electricity metering companies in the world for many years and it’s customer list includes companies like Itron, Landis and Jabil, all of them put together have very significant market share in global electricity metering market. This provides them with stability of revenue as PML is engaged with customers in new product development as they transition from one technology to the other.

• PML developed some products for these metering companies for gas meters, however over last couple of years these gas meter products reached their product lifecycle end and hence discontinued by OEM. Thus we see declining sales on gas meter side. Unlike for electricity meters, PML was supplying parts to single customer for only couple of models and hence discontinuation of single model by the OEM led to sharp decline in revenue. Management is developing some new components/modules for other technology/models in this segment however no concrete business is expected from this in near future. Thus Gas meter contribution may remain low in overall mix.

• Smart meter penetration is high in North America (around 80%) but there is still good scope for improvement in Europe where penetration is only 50%. In India it is only 1.5%. With increasing share of renewables in energy mix and need for smart grid it will become imperative to increase smart meter penetration. Thus there is reasonably large market size that exist and on top of that there will be replacement demand for existing base as typical lifecycle for smart meter is 8-10 years.

• PML has largely focused on export market on smart meter side - as the realizations per meter is much higher. In India typically PML component had realization of 20 Rs per meter while in export market it will be multiple times of that. PML is also working towards giving more module level solutions than components to increase per meter contribution.

• Overall with large opportunity size available, PML’s established position over couple of decades in this market and their relationship with all the top 3 players, one can expect steady growth in this segment.

Automotive:

• Automotive is relatively a new segment for PML and hence overall contribution is less compared to meters. However over last 5 years it’s share has grown steadily and from almost non-existent business to 25% share in revenue. PML started this journey around 2014 when next generation of promoter (MR. Sharad Taparia) rose to the helm and started transforming the company. They put in lot of efforts to develop relevant products for automotive sector using their expertise in metallurgy, casting and magnetics. As it is customary, it took significant time to crack this segment due to elongated sales cycle in automotive industry. However once they got their first entry, they have not looked back and scaling up the business both in terms of new customers, new products and new technologies.
• PML’s customer list on Automotive side includes some of the marquee names like Delta, Valeo, Siemens, Pegatron, Mahle etc. These are Tier 1 suppliers and essentially PML supplies to them. However as per process the design of PML components is approved by OEM in many cases to ensure expected performance and safety standards. This clearly indicates over years PML has gained prominent position in the automotive supply chain with marquee customers/OEMs.
• Another interesting thing that has happened (based on export data analysis) is that significant part of new customer addition happened in 2018-19 and many of those customers have scaled up business with PML year over year and are still on growth trajectroy. Customers added in FY 20 and FY 21 the same story. Thus, data points suggest that most of the new customers who start small continue to give incremental business to PML increasing their wallet share.
• PML supply current sensors, shunts, flux concentrators and magnetic shields and core for automotive segments. These components go into battery management systems, EV chargers and speed sensors. Thus PML’s components cater to both ICE And EV market.
• PML supplies to Pegatron and as per public report Pegatron was to put up dedicated plant in Texas to supply BMS and other passive electronics component to Tesla. Moreover Pegatron has large portfolio of products that is beyond automotive. As per our understanding, PML’s product and capability can be utilized in other areas too in future.
• Typical product lifecycle for some of the products/components on automotive side is 10 years to 20 years and once components is selected to be part of a program unless any major screw up happens by components supplier, the component remains part of the program. As per our understanding, PML is at various stages of program (some prototype, some commercial) and hence as and when these programs scale up (in terms of production volumes), growth in revenue can be significant.

Strategy:

• Post Mr.Sharad Taparia taking over the leadership position, he focused on building capability and competence within organization. The focus has changed from product development to capability building. This shift in strategy was made to ensure that company can insulate itself from product life cycle swings and can cross-germinate capabilities to expand the opportunities across segments rather than getting restricted to specific areas/industry. According to management in one of the AGMs PML now pitches it’s capability to customers and not the product/components.

• PML is extensively focusing on creating larger and larger pipeline of projects to counter the product lifecycles that come to an end. They are increasing the funnel of projects which are at various stages of development (RFQ, design, prototype, commercial). This ensures that while product life cycle for some of the existing products come to an end, other projects from pipeline kick in and the revenue loss is more than compensated by scale up in new projects( to counter things like gas meter share declining from 18% to 6%)
• PML works closely with customer’s design/product development team to develop new components/modules for the products thus once components is accepted and incorporated in product design, the switching cost for customer is quite high. This creates entry barrier for others to enter, at least in the same program.
• PML is focusing on increasing it’s capabilities from current sensing and casting to plastic moulding, wire harnessing thus preparing the organization to move from component supplier to module supplier. Obviously, capability building is a slow process and it will take time make this transition but over time, if they can pull it off, company can transition to next stage of growth.

Interesting fact:

• One thing that I really found interesting in PML was that even when it was 100 Cr Mcap company (and for that matter 100 Cr revenue 3 years back), if you look at their employee profile, more than 60% of employees (rough estimates based on profiles I scanned) have engineering back ground. This speaks volume about company’s focus on engineering and design. I have come across very few companies on manufacturing side who have such high percentage of employee having engineering background/

Financials:

• Even though financials are self explanatory one interesting thing is their margin profile changed from single digit to respectable high teens in 2018. This was primarily driven by GM improvement by almost 800-1000 basis points. Though this change in GM happened in 2018, the seed of that was sown in 2014 when company changed it’s track from focusing on magnet to focusing on newer segments/products with better margins. Even today, management is quite focused on tapping opportunities where the margins are reasonably good and would give pass to opportunities where revenue can be large but margins are much lower.

Risks:

• Even though PML’s top 5 an d top 10 customer concentration has come down over years, the largest customer still contributes significant part of revenue (20% plus in my estimate)
• Even though company has been able to maintain and improve it’s margin over last few years, in automotive segment typically auto ancillaries have to pass on the margin benefit coming from scale to OEMs . Thus with increasing scale, it’s realization per component may be lower in future

Disclosure: Invested since last 3 year and signficant part of portfolio. Please do your own research and due diligence as I am not SEBI registered investment advisor and this post is purely for educational purpose.

[Aluwalia]

How do you compare PML’s business from that of Shivalik Bimetal Controls?

[desaidhwanil]

I think both businesses operate in similar area but have slightly different characteristics.

SBCL has very strong bimetal business and is growing equally well (same as shunt side of the business). This business is less prone to product lifecycle technology changes.

SBCL’s key value add is understanding of metallurgy and EBW capabilities on the shunt side. However, majority of their business comes from strips that they supply Strips of welded metals to the customer- it is sold on per kg basis and further operations to convert into parts.

PML on the other hand has steady metering business however that business is susceptible to changes in technology and product lifecycle.

PML’s automotive business, they may be buying EBW strips from vendor like Shivalik and then convert the same into the parts that will eventually be used in BMS or any other module. Here one will require much more diverse design/engineering skills and understanding of various processes/operations. At this moment PML does not EBW part internally…if they can do it they will may have much stronger supply chain.

PML’s diversity of operations/skill set is much more fungible across industries is my limited understanding and it will also provide slightly higher cushion to the technology change that may happen. On the other hand if EBW is as big an entry barrier as currently understood ( I am still not able to put my fingers on why it is an entry barrier) then Shivalik may be able to protect it’s market share much better.

On the whole both are beneficiary of the tailwinds of the EV at the moment with PML having the potential to take the capabilities developed in this and move to more areas.

P.S.: This is all based on my limited understanding and am in no way saying I have figured this out so take it with pinch of salt. Any industry person’s feedback will be far more valuable

[Aluwalia]

PML have technically higher range of end products like sensors and Relays, but they still depend on companies like Shivalik for EBW shunts for their product manufacturing.

[vivek_17]

Rating Update

[vivek_17]

Seeing the sudden jump in price, recent credit rating update, that hinted at capex, I had a look at the EPFO data of the company. Their number of employees has been increasing steadily. In my opinion, the company may be coming out with capex announcement soon.

[Rohan_Edhate]

How to check epfo data of any company?