Pitti engineering-Longterm investment thesis
( By Dr pragnesh shah)
…
Business profile
30% export
70% Domestic
Value added and assembled pro.@70%
Loose lamination@30%
=Railway n metro@30%
=Industrial@15%
=power generation@15%
=Special purpose motor@11%
=Renewable@4.5%
=Mining,oil,gas@2.5%
=Data@2.5%
=Appliance@1.5%
=Company’s products find application in basic capital goods, such as motors and alternators, which are themselves quintessentially used in any process engineering.
=It is in the business of producing A…Sheet Metal(electrical steel laminations)
B…Die-cast Rotors & Assemblies, C…Stator Core Assemblies,
D…press tools
E… Machined Components for varied industries including
F…Fabricated Machined Components,
Main 4 industries
1…Locomotive @30%
=Railway
=metro
=off road vehicles
=EV
2…Industrial
=steel,cement,sugar
(Special-Purpose Motors, which can be deemed as a proxy for
steel, cement, sugar, and other infrastructure related business, )
=pumps
3…Power generation
(hydro,thermal,wind)
4…DG set(Generator) for ups
=Data centre
=5G
=hodpitals
=Residential and commercial spaces
5…Appliances
Products
1 …Sheet metal
2…Machining
3…Tooling
4…Shaft manufact.
…
Capex
2 cr@2011
19cr@2012
12cr@2013
17cr@2014
20cr@2015
9cr@2016
58cr@2017
115cr@2018
48cr@2019
23cr@2020
32cr@2021
1…2017@Hyderabad plant 4
…HIGH PRECISION MACHINING OF LARGE METAL COMPONENTS
2…2018@Aurangabad@226 cr
@Machining and laminations
… The mega plant at
Aurangabad is proposed to be completed in two phases- Phase 1 and Phase 2
… Phase 1 has been successfully completed with a
total cost of Rs. 226.00 crore.
= PEL is eligible for receiving a re-imbursement in the form of subsidy from Government of
Maharashtra for its Aurangabad plant for investment towards Phase 1 over a period of 7 years and has received Rs. 16.54 crore
in the form of investment subsidy in FY21.
3…220 cr capex
@will completed by 2024
@machining and laminations
=Under this expansion plan, we will
A… integrate our existing supply chain by setting up additional facilities for those components/processes which are currently being outsourced.
B…We are also going to add dedicated manufacturing lines/units for new applications segments
where we have made significant
inroads and are expecting sizeable
future business.
= These include
…railway undercarriages
…components for EV
(Electric Vehicle) motors,
…drivetrain systems, gear cases
, …unique engineered product solutions for wind turbine
applications,
…and medium and heavy
fabricated machined components
C… Post expansion, we would have added new technologies/ engineering applications such as
… high pressure green sand moulding,
…medium and heavy fabrication,
…very large five axis machining
capabilities and assembly facilities
for various unique products that find
applications in power generation, drive systems, motors, off highway vehicles among others.
=2022
we have completed 35% of the envisaged capex and remaining is on track for timely completion
=During the last one year our capacity has grown from 36,000 metric tonnes per annum to 41,000 metric tonnes per annum
=At the end of this capex cycle, our capacity will be 72,000 metric tonnes per annum (from existing 36,000 metric tonnes per annum
=At the end of FY24,
the machining capacity would double from its existing 350,000
machine hours to 700,000 machine hours.
=With the constant price, the revenue potential at the end of this capex cycle for the company shall be 1,800 Crores
=Capex Entirely is Brownfield, the facility that we already have in Aurangabad factory, we have
additional land available adjacent to it which is equal to two time the land that is already being developed so it will be coming up right in the same campus.
…
MOAT
1…ECONOMY OF SCALE
=With expanded capacity ,we have lower cost of manufacturing because of fix cost of sallary and asset
…India’s largest laminations manufacturer
…One of the few suppliers in the
world with tooling, laminations,
casting and machining
capabilities under one roof
…Largest exporter of electrical
laminations from India
…Leading supplier to to all motor
manufacturers in India
…Pioneer & Market Leader of assemblies for large
alternators & motors in india
…Pioneer
.The company is a pioneer in
the manufacture of traction motor sub-assemblies in India
2…ENTRY BARRIER-5000 different products
.
=There is a huge entry barrier, if what we talk of high level numbers if we go to the micro level we are more than 5,000 different products developed all of which are active for the
client, to compete with me some new entrant had to develop all the 5,000 products in one shot which is practically impossible which is the development of the last 30 years of
products so to this we are developing inventory of 5,000 products and every year we add at least 5 to 10 new products to our library.
3…ENTRY BARRIER-.FORWARD AND BACKWARD INTEGRATION
(Three different industries)
=It is one of the few suppliers with tooling, laminations,
casting and machining, all under one roof
=We are India’s only end-to-end product and service provider in the electrical laminations segment with strong presence in
tooling, casting, lamination and machining.
=The integrated presence helps us maintain
A…complete control of the product quality,
B…ensure value at all stages of production and
C…provide great comfort to our clients in terms of
dealing with multiple suppliers.
D… This integrated presence helps our customers depend on us
=The kind of product we operate it is
very difficult for a new entrant to come in, we compete with three different industries, we
have a combination of three different industries, we have changed the way our end customers do business
A…Traditional sheet metal
.so we started our traditional sheet metal company hence we always
talk in per tonne basis or per tonne capacity,
B… .Fabrication
but we have moved well beyond that, we have a fabrication facilities,
C…Tooling and machining
=we have our own tool room, we have our own machine shop,
D…Shaft
we have our own shaft manufacturing facility
= To replace us in the supply chain, first and foremost my competitor needs to find three to four different companies each in a different
field and then find someone to integrate the product, assemble and supply it as a ready to
use unit, so in terms of capabilities we have a unique product
=Competition risk: Emergence of a large number of competitors trying
for the same business can heighten competition risk which often leads
to revenue and margin erosion.
- Pitti Engineering, by successful pursuit of a number of forward and backward linkages, has emerged as a highly unique vertically integrated player in significantly higher value added solutions. Consequently, the company has not only insulated it from standalone competitors across the highly staggered value chain, but also, in the process, developed such stickiness that even fiercely competing customers would come to it, directly or indirectly, for its impeccable
customer value proposition.
=The competitive advantage provided by in house facility for integrated
end to end manufacturing processes including machining, assembly,
fabrication, casting along with an established large supply chain for
procurement of massive list of components required for assembly and sub assembly purposes, imparts higher value addition to the products.
This one stop shop characteristic of PITTI makes it invincible for its
downstream customers for their supply chain requirements.
4…PRODUCT DIVERSIFICATION
=Leveraging our strong engineering skillset, we have expanded into more value-added product lines which provide us with a new
revenue stream and decreases the impact of business cyclicality.
A=Our operations range from tooling and laminations to castings and
machining, leading to extensive value addition and providing one-stop
customer solutions.
B=Our wide range of products from 50 mm to 1,250 mm single piece electrical steel laminations allows us to cater to niche customer requirements – diversifying revenue streams and de-risking the business from single product dependence
6…INCUBATION PERIOD
@4 to 5 yrs for one product
=.It will take 4 to 5 yrs for single product from vendor regestration to ready to use product for any new competitior…
=Most of our customers will take at least two years to get a vendor for registration done, post that
development of one single product would take at least a year-and-a-half at the supplier end, then
the approval of the product supply to the customer it will go to a life cycle which would typically
take 6 to 9 months and then you would have the first pilot of supply and then the commercial
supply, so I would say about 4 to 5 year timeline for anyone to come in and then after that only the
other products would be offered to a competitor, and then again the similar timeline would be
there to develop the rest of the product portfolio.
7…Strong relationship
It is due to
=timely supply of
=Quality products at
=competitive price
=Crompton and Siemens are with us for over 22 years, whereas Cummins and ABB are our clients for 17 years
=.At Pitti Laminations, we are catering to evolving requirements of customers through developing better products and processes, focusing on quality parameters consistently, implementing best-in-class technology and sustaining price competitiveness.
=Relationship that we have with them is more like a partner rather than a supplier so we are very happy doing this for them, if they want us to
further go up the value chain and give them a ready motors we have more than willing to do
that, but going and competing with them is something that I would not want to do.
8…Margin
=Margin improvement
A=Value added products
If you take the products of the company, the simplest product that you make is a loose sheet
metal lamination. Now, obviously over there, your margins are going to be much lower and the
most value-added product that you make is a fully core-dropped stator frame and a fully
assembled ready-to-use rotor where the shaft is attached, the copper is put in by us. So, the value
add on the final, I am just giving you the two extremes. So, as you improve the product mix,
from just plain vanilla laminations to assembled and then in assembled also more value add as
you keep doing, your margin per ton will keep on increasing.
…The demand is for the more value-added kind of products.
B= Economy of scale
Second reason where your
margins will improve is that you have invested for 72,000 tons of capacity and you have scaled
up your operations as such. So, once your utilization factors go to 80% on 72,000 tons,
obviously, economies of scale kick in.
C=Automation
And the third one is automation. So, we are heavily focused
on automation. I would invite you to our Aurangabad facility to have a look at the kind of automation that we have already done, that will simplify and explain to you what kind of margin
improvement can take place due to automation.
=Our margins will not improve because commodities have
moved, either up or down. They do not improved or deteriorate
because of that. Both raw material as well as scrap, so the net raw material cost increase or decrease in the raw material cost is completely passed on to the customer, increase or decrease.
= We are chasing both the lower EBITDA margin per ton business as
well as the higher EBITDA margin per ton business. It’s not like we are
only focused on the higher ones. So, the lower ones would be your
consumer durables, EV because there the value add and the scales are
very different. So, the EV would be more like an auto ancillary kind of
business, not like a discrete engineering manufacturing kind of
business. We are also targeting increases in Indian Railways as well as other locomotive and Metro related businesses, which typically come
at a significantly better EBITDA margin per tonne. So, when you go to
60,000, the above impact of high and low EBIDTA contributing
products should even out and we should see around 42,000 EBITDA
per tonne.
9…Sole supplier
…In most of the products that we make which are intermediatory products which go into the final
product that our customers make, we are sole suppler in most of the places that we operate
10…BUSINESS GROWTH STRATEGY
Our twin-focus remains on
A… higher value addition in our products and
B…diversification of application
segments and geographies by developing new products. We
are intensifying our new product
development activities through
prototyping, pilot batching and
subsequent scale up
=Operating margin expansion and sales realization from higher value addition and new product development
=As part of our larger vision, we continue to focus on remodelling our strategic framework that focuses on building a differentiated product by understanding the needs of the customers and adding value to our product thus creating a new market for the same
C…Not pricing power
Our customers are solely dependent on us, but we are also depending on them right, in the industry
they are the giants, there is GE, there is Simens etc then we will have a comment you cannot
name a fixed customers so in this industry if I have a monopolistic position or a pricing
power if I exercise it I am going to start firing relation so you know it is more of a partnership, these clients are be with us for 30 years and we have grown with them, so you
know using the word monopolistic is not good with these kind of relationship.
11…CYCLICITY
Leveraging our strong engineering skillset, we have expanded into more value-added product lines which provide us diversification with a new
revenue stream and decreases the impact of business cyclicality.
=As new segments /industries are added,we are less dependant on perticular industry
and so less vilnerable to cyclicity
Diversification is due to
X=Our operations range from tooling and laminations to castings and
machining, leading to extensive value addition and providing one-stop
customer solutions.
Y=Our wide range of products from 50 mm to 1,250 mm single piece electrical steel laminations allows us to cater to niche customer requirements – diversifying revenue streams and de-risking the business from single product dependence
…
Negative
1…Customer concentration
=Top five would contribute about 60% to 65% of revenue.They would be Siemens, Wabtec, they would be ABB, they would be Cummins and the fifth number keeps changing on and off sometimes it is Toshiba, sometimes it is Crompton, so the fifth number keeps changing but top four always remain constant, Siemens, ABB, Cummins and Wabtec.
2…D/E RATIO
2021@1.27
2020@1.09
2019 @1.29
2018@1.53
=It will come down because we will
have the repayments of the previous debts. So, close to Rs. 40 crore
debt is up for repayment in the next 12 months. Whereas, if you see, I
said that we are going to add about Rs. 120 crore to 150 crore of
CAPEX, over the next year, with 1:2 debt equity. So, about Rs. 80 crore
of total debt will get added, Rs. 40 crore will get repaid. So, the net
position will be about Rs. 40 crore. Then for the subsequent year we
have Rs. 70 crore of CAPEX for FY24, again at 1:2 debt equity you
know, you are adding maybe over Rs. 25 crore or Rs. 30 crore of debt.
And again you will have a huge repayment. So, your debt will peak
out. It is only to tide over the timing.
3…pledge(20% of promo holding )
=Pledge is to the bankers of Pitti Engineering, and not something I would have like to do, it is
stipulation(order) from the bank, SBI have the stipulation that a percentage of the promoter holding
is pledged to it and I am only complying with the covenants of the loan agreements, if you
become debt free, yes, definitely all the pledges will be removed
- …High working capital days
=The company continues to be working on reducing the operating cycle. Working capital cycle as on September 30, 2021 stands at 99 days.
=We have set ourselves a target of reducing this to 75 days within the following year.
=it’s already down to from 97 to 92, so some improvement is there,
when I say stable it is still some improvement. And we are working on
it. And it will take time, see it will not happen overnight. So, we are
fully committed to bringing it down.
=Our long term target is to have debtor days down to 45 and the total working capital down
to 60 days.
5…Economic risk:
Capital goods sector is inextricably linked with the overall economic, infrastructural and industrial growth of any country/region.
6…RPT
=The relationship with Pitti Casting is that we buy these castings
that are used in our machining business as well as the value add
business from them. They are the approved supplier from our end
clientele for many of the parts that we machine and sell. As far as
merging these two companies are concerned, subject to Board
approval I am pretty much open to merging it subject to regulatory
permission and Board clearance.
=Pitti Electrical Equipment and Components are our holding
company, promoter holding companies. So, I don’t see any merger
possibility with them
=only entity which has other business is Pitti Castings
…
FUTURE GROWTH
1…Aurangabad plant
PEL has two plants at Hyderabad and one plant at Aurangabad. The Aurangabad plant started its operations in January 2018, after the facilities from Hyderabad were partially shifted to Aurangabad. This shift to Maharashtra brings the Company in proximity to its customers as well as raw material sources.
=The reason that we have setup the facility in Aurangabad is
A… highest concentration
of our domestic client based is Maharashtra
So reduced logistic cost
B…Near to raw material supplier
So reduced operating cost
C…Besides, advanced manufacturing features like robotics, automation and IoT, integrated sheet metal, machining and assembly operations have helped improve efficiency and remove redundancies
=Plant shifting will supposedly reduce the Company’s logistics and operational cost to a significant extent, making its operations more competitive.
2 …Last 5 yrs(2016/2020)Growth strategy with capex of 230cr
=Last 5 yrs change in business from commodity to value added
=Major chunk of our output comes from a fully assembled and ready to use product rather than loose laminations so that is the change that we have driven in the past 5 years which makes us indispensable as well as increases our margins.
=2017-18 was a transition year, in which we streamlined and strengthened our portfolio and operations(2018 AR)
A– Exit
=Exited our labour-intensive facility in Plant 1, Hyderabad
B–Aurangabad plant
=Commenced operations at fully
owned state-of-the-art Aurangabad
facility with automation and robotics with reduced operating and logistic cost
C– Hyderabad plant 4
=Commenced commercial production at new facility in Hyderabad for
high‑precision machining on large
metal components. The expanded
machine shop will also help in meeting GE and Alstom railway orders
D– Integration
=Progressed in terms of developing as an integrated player
=Having successfully brought together such a compelling combination – tooling, lamination, machining, assembly – we started exploring the new applications segments and customers that would like to benefit from our vertically integrated capabilities.
E–New segments and new customers
=We reached out to more
than a dozen new application segments, showcasing our capabilities and learning the pain points of these newly engaged customers.
3…New products
=Going forward the product profile will increase and go towards more high value added products.
A=Fabrication
=With the objective of increasing product portfolio for its existing customers,
the Company has capitalised on its capex additions to enter into fabrication of Truck Frames, which is the under carriage of railway engines, to supply for the domestic operations of one of its prestigious international customers.
The success in this new product is expected to unlock new market
opportunities in International and domestic markets as there exists huge
untapped opportunities with Indian Railways for the product.
B=Shaft
=22.50 crore Investment in new
product line- shaft manufacturing
=In line with the strategy to move high up along the procurement value chain
of its downstream customers, the company has begun supplying shaft inserted rotors by manufacturing shaft in house, thereby facilitating unique
positioning of PITTI in the supply chain of this product for its customers.
4…New promising sectors(>50%rev)
= It is encouraging to see emerging
segments like
=power systems for data farms,
= electric vehicles,
=Railway n metro for mass
urban transit systems,
= renewable energy
segments starting to make sizeable
contributions to our order book now.
=Appliances
=Till about a decade ago, all our
supplies were headed towards
DG sets and various industrial
drives.
=Thanks to our thoughtful expansion of business offerings and
diversification of user segments,
more than 50% of our revenues come
from newer segments today
4.A…EV
=The stator and rotor that we supply do find application in EV and we are in active discussion with a couple of end users to develop these products, we should be able to you
know state something more explicitly in the next 6 to 8 months.
=It’s more of an
exploratory product that we are developing for a very reputed two wheeler manufacturer, for their EV application. If successful, it has a
tremendous revenue potential, which I cannot quantify as of now.
= All these applications put together have a revenue potential to add about 45 Crores of top-line per year going forward
=• The Company has received LOI for supply of stator and rotors
from two reputed customers manufacturing for e-bicycles and
2 wheelers in the EV space.
=My view on the sector would be that it’s an emerging sector. So, any
potential number is always thought with little bit of risk. But also, at
the same time, I would say that this is a fast growing sector. So, any
numbers that we are seeing today can increase exponentially in year’s time as well. It all depends on how quickly the country adopts
and accepts electric vehicles and E-mobility
4B…Renewable energy
=I am pleased to report that the company is gradually making its foray in sunrise sectors such as the renewable energy space.
=We have collaborated with a Germany based wind firm for the supply of windmill
pedestals and bearing flange for its project in India.
=Along with it, we have received new
orders for steam turbines and hydel pump parts for hydro power generation.(Govt has apptoved hydro power as renewanle energy)
4C…Data centre and dg sets
=Data power systems if you see we have started to give a separate line item in our presentation, we see huge demand coming from this segment, apart from that the
=Data centres have become reality in the last two to three years with a current capacity at 600 megawatt and plans are a foot to add another 2,500 megawatt by FY26, which is a fourfold increase from the current capacity.
=Pitti Engineering is in the manufacturing of components for generator sets for data centres and have been supplying to Cummins India for the last three years and the company is witnessing cumulative volumes of orders on a month on month basis.
=Data centers require 24x7 power availability and must therefore employ backup generators and multiple data routes to ensure Uninterrupted Power Supply (UPS). This is true no matter the physical location of the center, but is especially the case when the data center is located in a country or area where power supply is known to be unreliable.
=For Pitti Engineering’s generator set segment is going to contribute a large chunk of business as the demand is increasing to provide access of uninterrupted power supply for crucial applications like data centers, hospitals, 5G Network, high rise residential and commercial complexes
4D…5G and dg set
=Cummins management and analysts believe that the 5G networks require generators to sustain base stations and towers which CIL can produce and export in large numbers. The fact that China and Japan do not produce the kind of generators needed to power these towers means CIL has the potential to win large orders, they say.Cuminis is customer of pitti
=We estimate the additional 5G opportunity at Rs 200 crore per annum for Cummins India on an annual basis and growing over the next five years
4E…Hospital and dg set
The importance of uninterrupted power supply in hospitals
can be gauged from the potential cost measured not just in
economic terms but higher cost of patient well-being. The
potential demand for quality DG sets in hospital industry can be
estimated by considering the hospital beds in India
4F…Railways and metro
=With the implementation of the National Railway Plan, the Railway sector also presents significant scope for growth.
=Today in terms of railways, railways I would say including metros because that is how we
account for it, 28% of our business comes from railways, going forward we see this
business increasing by 25% to 30% in the next two years.
4G…pump
New infrastructure development has also created new demands in the
pump industry along with replacement demand. The company has
proactively increased capex to boost its capabilities to cater to the rising
demand even as the Company is prepared for adapting to the changing
efficiency norms.
=Industrial pumps are witnessing a high demand from cement, steel, oil & gas, water & wastewater sectors
4H…Appliances market
=A small, yet key addition to our
user segment was consumer
electricals - where we started
supplying lamination assemblies
for fans.
=The Company’s capacity expansion program to modernise its press
shop with high-speed presses is in line with the objective to enter the
high-volume appliance market, which is transitioning towards organised
sector for fulfilling its procurement requirements. The shift, driven partly
by withdrawal of many players from the unorganised sector in the post
pandemic scenario along with changing efficiency norms and rising quality awareness amongst the end consumers, is forcing appliance manufacturers
to source components from established players in the industry.
5…China plus
=we always had better price parities than China so much of our
products were indirectly exported back to China, so in terms of competitiveness we have
always been competitive,
= in terms of demand environment, yes, we are seeing a definite
shift wherein now this China Plus One policy at the global sourcing level and more and
more global sourcing is getting diversified to safeguard against any geographical and
political risk.
…
POSITIVES
1…Promoters increased their stake @ 90 per share:
=The Company allotted 22,22,222 convertible warrants at a price of INR 90/- on preferential basis to the persons belonging to Promoter/ Promoter Group on 14th February 2018. The same were converted into fully paid-up equity shares on 24th June 2019
2…Started its operations in 1983
Experienced promoters
3…Reputed clienteles
=Top five would contribute about 60% to 65% of revenue.They would be Siemens, Wabtec, they would be ABB, they would be Cummins and the fifth number keeps changing on and off sometimes it is Toshiba, sometimes it is Crompton, so the fifth number keeps changing but top four always remain constant, Siemens, ABB, Cummins and Wabtec.
=In the laminations segment our domestic clients include ABB, Andritz, Alstom, BHEL, Crompton Greaves, Cummins, L&T MHI, ReGen Powertech, SE Electricals, Siemens, TDPS and Voith, among others. Around 36% of our domestic revenues are derived from existing relationships with long-lasting clients (Crompton and Siemens are with us for over 22 years, whereas Cummins and ABB are our clients for 17 years
…
FINANCIALS
1…Cfo>pat
Cfo=420cr
Pat=170 cr
2…fcf%…capex
2021= 0.1% / 33cr
2020=8.7% / 23cr
2019=3.6% / 48 cr
2018= (-) / 115cr
2017= 5.3% / 58cr
2016= (-) / 9cr
2015= 7.7% / 19cr
3…ROE/ROCE…consistent
2021=12.20/14
2020=8.22 /12
2019=13.47 /17
2018=7.29/ 12
2017=3.83 /7
2016
4…OPERSTING MARGIN
2018 to 2022@15%@Stable
2016@6%
2011 to 2015@11 to 13%
5…Operating (avg) growth rate
Last 3 yrs@16%
Last 5 yrs@24%
Last 10 yrs@13%
6…Sales growth rste
Last 3 yrs@13%
Last 5 yrs@15%
Ladt 10yrs@10%
7…D/E RATIO…
2021@1.27
2020@1.09
2019 @1.29
2018@1.53
8…Interest coverage ratio
2021@2.20
2020@1.58
2019@2.36
8…receivables%
2022=28%
2021=33%
2020=26%
2019=29%
2018=36%
2017=31%
2016=36%
2015=30%
9…debtor days
2021=121
2020=97
2019=107
2018=132
2017=116
2016=133
2015=112
10…contigent liabilities
11…invent days
2021=171
2020=143
2019=107
2018=132
2017=116
2016=132
2015=112
12…invent turnover ratio
2021=3.30
2020=4.15
2019=6.21
2018=2.93
12… Current ratio@1.13
13…promo hold+
14… Equity dilution+
15…sallary @7.4%
2021@2.15cr
Pat@29cr
16…RPT@20%
With promo companies@100 cr in 2021
Rev@ 518cr in 2021
17…Dividend
No dividend since 2016
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