Permanent Magnets - Business under transformation?

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.

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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

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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

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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

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

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

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PML Corporate Film

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

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

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

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

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