Pix Transmission - low profile smallcap company

RajeevJ · May 8, 2021, 5:27pm

Pix is repeatedly hitting life time highs. I guess it is slowly catching the attention of the investing community. With the ongoing expansion, it is only a matter of time before it makes new highs in terms of Sales & Profits. The current year 2021-22, should have Sales closer to 450 crs with PAT of about 68 crs. The next year 2022-23, being the first full year post the expansion, the Co. could do Sales in excess of 550 Crs on a conservative basis with profits in the vicinity of 88 crs. The current market cap is about 615 crs. The stock could go a long way from current levels with potential re-rating with cash profits of about 100 crs in 22-23.

The earning visibility is clear. The stock despite the run up, is still pretty under valued even on conservative methods of valuations. There will always be the occasional correction, sometimes severe, to shake out weaker hands. The retail needs to keep the faith, hang in there & enjoy the ride!

ayushmit · May 9, 2021, 2:21am

Rajeev ji, thanks for providing continuous updates on the company, they helped me stay put during challenging times. I have also been invested in it since 2017 or so and seeing the good performance and delivery by the company, have increased my investments over last 1 year.

I agree that there are several interesting things in this company like:

Belt is a consumable product and it seems co is now the second largest player after Fennar. Its not easy to grow in business like this and after a point scale gives lots of advantages
Pix is more into replacement/after market and has been able to build a brand/name for itself.
It has large no of SKUs and its not easy to manage the same. This could also be a moat like we saw in BKT?
Co has been continuously investing into up-gradation/automation of plant.

On nos I like the following:

Not easy to find businesses with operating margins of 20%+ yet stock at less than 10 PE
Gross margins are pretty high at 60% or so (with scale these translate into better profitability like what we are seeing in recent quarters).
Co announced expansion again and gave quantitative details.
Better growth and de-leveraging in recent years.

On the negatives I see that that there are short comings in the way co is presented and managed and perhaps in past there have been few wrongdoings too. I have seen the same with several other family run cos when they are small. But hopefully as they become bigger, they learn and get better advisors to transform. Lets hope the management realizes the same here too and takes corrective steps to adopt modern governance practices.

Regards,
Ayush
Disc: Invested from lower levels in family and client accounts.

sahil_vi · May 12, 2021, 2:16pm

Thanks to @msandip for suggesting me to study this company. Thanks to everyone who has added valuable insights about this small company, specially to @RajeevJ sir who shared the research reports from Vibrant Securities which add a lot of value in terms of being able to understand the company.

I am adding my summary of the understanding of the company. Some of this might be repetitive so would request moderators to delete if needed.

Positives

Pix is primarily into making synthetic rubber based belts for various end industries.
Their two main segments are Agricultural equipment (trackers, tillers and many mechanisation related equipment) and industrial belts (which find applications in various end industries like Power & cement. Pix is primarily into the replacement market.
These belts are important for the end industry to keep running seamlessly and hence the industrial belts are changed proactively at some cadence (every X months). This creates a rather recession proof demand for the end product. Companies would stop setting up new factories when a recession in a sector happens. But most companies would continue to run existing factories and thus replace the belts.
Since the belts are only a small part of the capex, the quality and reliability matter a lot. If the belt breaks down then pix needs to replace it free of cost. This speaks about the entry barriers in the business.
Complex tools and experience are required to manufacture these belts and as a result of these entry barriers, the industry is fairly concentrated with only 2 companies dominating the market in india. 6. Pix has a large market share in agri related belts.
The sales are split 50/50 between exports and domestic market.
The largest player in North America Market (Gates) has 40% market share and the replacement NA market was roughly 5000 cr in 2018. The NA and in general export market has much better margins (the NA customers care even less about the price and even more about the quality). Pix is able to compete with Gates and stock their belts with same distributors and gain some market share.
Pix has a large share of the India market. I did not find a comprehensive number for India market size but if we pix has 50% market share in india, then the market is 350cr in India.
The export part of the business is where pix will gain market share due to much lower cost manufacturing that they are doing in India. Recent investments in automation shows management’s capabilities to modernize and further reduce the operating costs providing even larger cost advantages vis-a-vis global peers.
Indian agri is severely under-mechanised. Modernization of agri will create demand for mechanisation tools creating demand for pix’s belts. Capital goods sector has good tailwinds due to major capex being done by most companies anticipating economic revival. This would eventually lead to replacement market demand for pix’s products. The entire indian V-belts sector should see high growth for at least a few years. The fact that the size of NA market itself is 14x the size of Indian market shows the growth potential of the sector in India. Indian market would continue to grow (in proportion with GDP growth) for a long time to come. Pix might not be able to capture market share in India, but overall high growth of the industry forms the core of the thesis.
Anticipating all this demand, management has announced capex to expand manufacturing capacity by 150% and expect to complete the capex by FY22 end. This gives us some indication of the kind of growth which is coming our way.
Company’s credit rating has also been improving because the credit rating agencies also recognize this same tailwinds in the company’s business.
Perhaps the largest positive for a retail investor is that this company is definitely under-researched and under-owned by institutional owners. This IMHO is also the key reason for the low valuations compared to profitability and growth. As the company scales up in the next few years and the market cap increases, I would expect the valuations to improve as well as more institutional owners come on board. Having said that I would also caution all potential investors to understand that this is a microcap and can end up being illiquid, exiting from an investment might be difficult.

Negatives

Lot of people have raised questions over the promoter remuneration with the core of vijay sir’s article focusing on RPT as a way for promoters to take money out of business. In my humble opinion, reality is often not as black and while as investors would want it to be. Please see the data below:

Attribute / Year	FY20	FY19	FY18	FY17	FY16	FY15
Sales	304	295	253	239	224	212
PAT	30	29	23	16	7	4
Employee Costs	77.42	69.14	62.03	56.52	54.36	47.04
PAT Margins	9	9	9	6	3	1
Promoters Remuneration	8.87	8.18	7.19	6.52	5	4.58
Employee Costs as % of Sales	25.47%	23.44%	24.52%	23.65%	24.27%	22.19%
Promoters Remuneration as % of Employee Costs	11.45	11.83	11.59	11.53	9.19	9.73
Promoters Remuneration As % of Sales	2.91	2.77	2.84	2.72	2.23	2.16
Promoters Remuneration As % of PAT	29.56	28.2	31.26	40.75	71.42	114.5

Lot of people would take issue with promoter salary as percent of PAT being very high. However, investors should also observe that this has been coming down, as company is scaling up. I think the more relevant metric to look at is the promoter salary as a percent of Employee costs. Are the promoters taking most of the employee costs home or also distributing the money to the rank and file employees? What we see here is that promoter salary as percent of total employee costs has largely been stable and there was only 1 minor bump when the PAT margins has shot up drastically. I think promoters being technocrat and capable, taking a salary which has a percent of PAT is declining and as a percent of total employee costs is stable is not a large negative in my books.

The thing which worries me a little more is the unit economics of the business. This is a capital intensive business which is demonstrated in the return ratios throughout the years. This also means that high growth would necessarily have to be debt funded, company cannot manage to grow fast from internal accruals. In a capex up cycle, specially with interest rates low (like right now), all of these are things company can manage. In a capex up cycle, domestic business return ratios would also improve as demand for company’s products improves. Company can secularly improve the return ratios if the percent of exports increase due to higher margins in exports.

Disc: Have a small tracking position. Still considering whether to invest.

sahil_vi · May 14, 2021, 1:47am

I am continuing to study pix. At the outset I would like to note that this this post is not any aquisition or red flag against pix. I am only sharing my findings for the benefit of larger investor community and as pure information sharing.

Pix’s auditors are BL Ajmera and co who are part of the Ajmera group of companies. Please see this link to better understand the the auditor firm and their group structure: https://www.topcafirms.com/ca/jaipur/b-l-ajmera-co

Agmera group company (an investment firm) has been charged by ED for commiting investor fraud.

One can also confirm from the auditor 's email id that they belong to the same group being tried by ED.

what all of this information tells me is that the quality of the auditor firm is a poor. This also makes us question whether auditors might approve grey area things at pix. Some potential investors were worried about promoter RPTs and hence i thought of sharing my findings about auditor firm quality. At the same time I want to reaffirm that in my mind, it raises absolutely no direct questions about pix.
disc: still only have a tracking position. I am continuing to think how to incorporate this information into my invest no invest decision.

sahil_vi · May 15, 2021, 12:58pm

Industry tailwinds and Competitor Analysis

In my view, one of the most important part of any investment thesis are industry tailwinds. This is important because individually a company might be brilliant but if the entire industry is facing headwinds, then company can at best hope to maintain sales.

Pix derives 48% of its revenue from exports. These are higher margin than the domestic business. Pix’s largest global competitor (as far as I know) is Gates Industrial Corporation plc. (NYSE:GTES). In this post I analyze gates as a proxy for analyzing the industry as a whole. As per one of Rajeev sir’s post, Gates commands 40% market share in NA market. Thus it is reasonable (though not 100% accurate) to take gates as a proxy for the industry. This analysis also serves as a competitor analysis since gates and Pix are direct competitors at least in the NA market.

Company description

Gates is into two main lines of business: Power transmission and Fluid power. The Power transmission sub-business is the one which competes with Pix and this all analysis focuses on that part (unless not possible).

Q1CY21 performance

Gates’ Power transmission business did 559M$ in Q1CY21. This is an increase of 27% YoY. Gates’ adjusted EBITDA margin was 23.7%, +5.7% YoY. Margin expansion was driven by volume growth (operating leverage). Gates is a global company. Gets 46% of revenue from NA, 12% from Greater China, 25% from EMEA, 12% from EA&I (East asian and India) and 4% from South America. They showed decent core revenue growth in all geographies. 12% in NA, 18% in EMEA, 42% in South America, 24% in EA&I, 72% in Greater China. ROIC of 17%. Company has guided for 18-21% Core revenue growth in CY21. This is an upgraded guidance over previous guidance of 9-14% growth. Guidance of 22-23% for adjusted EBITDA margins. Company is doing 90M$-110M$ capex.

Q1CY21 concall notes

Economic momentum is building across most of our end markets, resulting in solid performance for the quarter that significantly exceeded our original guidance and the updated expectations we provided at the beginning of April.
Margin expansion was driven by gross margin improvement, increased volume, our restructuring actions & strong operational execution.
Growth in Power Transmission was led by the industrial end markets, primarily diversified industrial, personal mobility and on- and off-highway applications. Sales across replacement channels showed strong growth but were outpaced by those into first-fit channels. (Sahil’s notes: Pix is primarily into replacement market only).
In Power Transmission, our industrial chain-to-belt revenue grew approximately 50% YoY. (Sahil’s notes: Pix gets a large % of revenue from industrial belts).
We believe that inflationary pressures, while significant for the remainder of the year, are manageable, and we remain confident that price will offset inflation for the full year.
Saw very positive demand trends throughout Q1 as I’ve outlined. What we have seen in April, particularly in order rates, certainly reflects the continuation of the same trend. It’s been quite broad across, frankly, all of the regions.
We will be dealing with some incremental headwinds, particularly associated with labor availability in the United States and the decelerating auto OEM demand as our customers are facing more challenging supply chain issues on their end and I think that the well-reported issues in India associated with COVID. (Sahil’s Notes: Neither of these headwinds applies to pix).

Pix Size of opportunity Estimation

Gates did 3B$ of sales in 2020. 64% were in power transmission division. 64% of those were for replacement market. 48% of sales came from NA. This puts Gates’ North america power transmission replacement channel sales at 600M$. As per Rajeev sir’s shared report, Gates has a 40% market share in NA. This puts the NA Power transmission replacement market size at 1.5B$. Since we do not know Gates’ global market share, we cannot estimate the global market size. However, if we just extrapolate the 40% market share which they have in NA to the world, we would estimate the global market size (for pix’s addressable market) to be 3B$. According to these calculations pix has a roughly 1.5% global market share. This shows us the size of opportunity for pix to grow their exports and capture global market share.

Gates and Pix Peer Comparison on Numbers

Attribute / Company	Gates	Pix
TTM Sales	21600	355
Gross Margin	38%	63%
Operating Margins	11.60%	20%
Net Margins	3.80%	14.50%
Asset Turnover	0.4	0.8
Total Debt / Equity	86%	29%
Last 5 years Sales growth	1.50%	8.50%
P/E ratio	46	12
EV/EBITDA	14.1	7.4

For the sake of consistency, all numbers have been taken from the tikr.com pages.

Conclusion

Pix’s largest competitor is growing well. This shows global strength in demand for V-belts. The concall commentary is also very positive for 2021 outlook. They are able to pass on inflation by adjusting prices. Pix is very small compared to global opportunity size. Pix has better margin profile and asset turns and yet is undervalued compared to its global peer, possibly due to it being a smallcap which is largely undiscovered by institutional owners. There is some possibility for rerating.

Disc: Have a small position, planning to invest more next week.

Sources:

fundoo · May 16, 2021, 4:38am

HI @sahil_vi, thanks for the detailed analysis. I am also deep diving into the business and few questions:

1/ Is the capex done by co related to end market growth or it is driven by gaining market share in exports? If it is driven by increased market share then what has changed in the company that it is able to gain market share (next gen management or improving product quality or increased distribution network)?

2/ Does the co has ability to pass increased raw material prices to the end customers? Does the product pricing varies with raw material or it is increasing/being stable consistently over years? Is the co a price taker set by the competition? What will happen to margins once crude oil prices start to increase?

Thanks much

Jose · May 16, 2021, 7:46am

The company has a high proportion of Trade receivables + Inventory when compared with Quarterly sales.
For instance, Trade receivables – 67 crores
Inventory -80 Crores
Q3 Sales - 108 crores.

So I just wanted to know more about the receivables. Surprisingly the company has a lot of data about Receivables. As per AR’20 and ’19 the following are the age of receivables.

The company’s allowance for doubtful debt at 20 % for receivable above 2 years looks pretty low. However, if you look more carefully, the receivable above 2 years have come down drastically from 202.97 lacs in 2018 to just 25.18 lacs in 2020. A similar kind of improvement can be seen in receivables above 1 year which was at 381.94 lacs in ’19 came down to 147.15 lacs in ’20. That in a way shows the company’s ability in recovering receivables. Once you see the improvement in receivables in the higher age bracket, it will be interesting whether the company has taken any impairment on receivables.

As per AR’20 the company has taken an impairment of 39.29 lacs in FY 20 and 85.00 lacs in FY19. Eventhough the impairment is above the company’s allowance for doubtful debts for receivables, its very close to it.

From what I understand the company has been able to significantly bring down receivables that are more than 1 year old with very small impairment. Also 92% of the receivables are less than 6 months.
I would have loved it if they would have given a less than 3 month period receivables as well. That would have made the analysis better.
As per AR’20 there are 2 customers accounting for more than 10 % of receivables. An idea about who these customers are, may help us in better understanding pix’s markets

Discl: Have a tracking investment

sahil_vi · May 16, 2021, 8:19am

This level of information is unfortunately unavailable in public domain. However, we can use some proxies.

Time		2020	2019	2018	2017	2016	2015
Pix	Revenue (in cr)	304	295	253	239	224	212
	YoY Growth	0.03	0.166	0.058	0.066	0.056	-
	Exports	141	135	123	117	111	-
	YoY Growth	0.044	0.097	0.051	0.054		-
	Domestic	163	160	130			-
	YoY Growth						-
	% of sales from Exports	0.463	0.457	0.486	0.489	0.495	-
Gates	Revenue (in M$)	2793	3087	3347	3041	2747	3042
	YoY Growth	-0.095	-0.077	0.1	0.107	-0.096

Few observations:

For pix, exports as % of sales has been roughly constant. Neither growing nor shrinking. To me, this suggests that there is no special management strategy to focus on exports. Senior/early investors like Ayush or Rajeev sir might have insights in case they might have talked with management about this.
In last couple of years, gates revenues have gone down whereas Pix have reduced at low single digits. This implies market share gain in last couple of years in exports. If you see the research posted by Rajeev sir, you would observe that Pix sells its products at lower price point than gates in NA market. This could be one reason for market share gains.

If you look at the gross profit margins, you would observe that they have been largely stable.

To me, this implies ability to pass on prices. Also if you see gates’ concall I posted in last post, they say a similar thing. That they would be able to pass on inflation in raw materials as prices increase.

Sun_Light_17 · May 16, 2021, 8:59am

I have an experience of such types of industrial items business ( retail)
And I think giving credit is normal in such businesses s

Giving credit is a one way to keep the ball rolling
I will not be much concerned about the debtors but I will look for the provisions and bad debts data against it

RajeevJ · May 16, 2021, 10:31am

Great work Sahil! You have taken the research on the Co. to another level altogether, which is of enormous value to all current / future investors in the Co. Thanks indeed!

When I visited their plants over a year ago, everything seemed a notch or two higher that what one expected to see. In terms of the infrastructure, the automation. the robotics, the research centre, the conference room etc. etc. were all above the level of a 300 cr. Sales Co. Even the logistic hub currently being developed, I believe is state of the art. The mgt. is aware of the growth prospects abroad & hence the current expansion. The next generation being technically qualified, is geared to take the Co. to greater heights so the next 2-3 year period could certainly bring more awareness about the Co. amongst investors.

There is another possibility here that is difficult to quantify at the moment. India is where the action is. A Co. like Gates / similar, would be very keen to have a presence here. The Mgt. is aware of this which could be another reason of creating world class infrastructure. Any MNC could simply step in! The promoters currently taking home large remunerations could simply be replaced by a CEO with a couple of top level executives at half the cost, which could improve the financials further. This is however, not the base case scenario & there is no knowing when it would happen, if at all. The mgt. is however is aware of what it takes to punch much above its weight. It sold it Hose division to Parker for about 250 crs, when its own market cap was a mere 90 crs! The bill will not be less than 1200 to 1500 crs now!

VIMAL_AGRAWAL · June 5, 2021, 6:00am

i had donesome schuttlebutt, my cousin has a shop in rural areas of rajasthan , he told me pix is great brand people want from his name , but another thing also there also some brands like hilton, continental,lots of plants in sonipat, repeat order between 9 month to 1.5 years. hope it helps
disclaimer
invested tracking postion
i m not sebi register

ravi_ambati · June 25, 2021, 11:27am

Excellent Q4 results.

On a standalone basis, Revenue grew by 15% SEQUENTIALLY from last quarter. PBT margin intact at 22% when most companies have seen compression due to RM increase. Appears this is a really quality microcap. With the planned capex, there is good visibility on future growth.

Dividend of INR 5 per share is an icing on the cake. Thank you @RajeevJ Ji for this excellent find.

sharemarketgen_ · June 25, 2021, 11:41am

Only disconcerting thing from these results is the weaker cash flows inspite of surge in profitability for the full year.This has come mainly from a sharp rise in inventories.However,this is an across industries phenomenon given global logistics issues and shortages of various RM.My guess is company would’ve stocked up RM anticipating good demand continuing into the new FY and in that case WC should normalize in H1.The dividend payout is in-line with their 9-12% range in recent years.

sahil_vi · June 25, 2021, 11:47am

Brilliant set of results.

52% growth in quarterly Revenues YoY.
31% revenue growth for entire year YoY.
For the full year, gross margins have been around 64% in FY19, FY20, Fy21. This shows Co’s ability to pass on RM price increases, if any. even in Q4Fy21, gross margins are around 63%.
The reason operating profits and PATs growing decently is that operating leverage is playing out. As an example consider that employee costs are almost stable in Q4 and gone little bit down in FY21 YoY basis.
While inventory going up is a little bit of concern but as sagar mentions, it also makes some sense in the broader context of 1000s of SKUs, strong demand, exports, shipping concerns.
What is heartening to see is that trade receivables has grown quite low compared to growth in revenues. Trade payables has grown at much faster clip, which is also good for the company. Shows flexibility they are able to get with suppliers. This shows up in the improved unit economics. RoCE is 27% For FY21.

Disc: invested, positively biased.

chikspat · June 25, 2021, 11:59am

Yes. Great numbers and consistent growth. Now let us wait for institution investors to find this gem. Patience of holding since 2018 is finally paying off.
CAPEX in next 6 to 12 months will provide more revenue and profitability growth, as they are investing in supply chains .
Disclosure: Invested.

vivekchat · June 26, 2021, 1:24pm

Hi Rajeevji, I have a query regarding the expansion announcement.

The note states that the capex required for expansion of MIDC plant is Rs. 21.32 crs for proposed capacity addition of 270 lacs belts per year. The current capacity is 180 lacs belt per year. How is the capex cost so low for adding 150% of current existing capacity when the current gross block of Plant and Machinery is quite high.

Similar doubt for the 121% proposed expansion in capacity of the TRP plant where additional capex is Rs. 12 crs only.

Am I missing something basic here? Is it that these are just semi-finished products which are then further processed to make finished goods?

Also what could be the potential incremental revenue from these expansion plans given the fact that the company in the past has had low fixed asset T/O and this proposed capex is also not very big?

Regards,
Vivek

sahil_vi · June 26, 2021, 3:24pm

Although question is for rajeev sir. I will attempt to answer. Would also love to hear rajeev sirs answer.

It is not fair to compare a part of the capex (20cr out of 60cr) with current gross block of plant and machinery since you are discounting the rest of capex, some of which would also go towards plant and machinery, just not at MIDC.
Best form of capex is debottlenecking. Then brownfield. Then Greenfield. This looks like a mix of debottlenecking and brosnfield capex. So it should not be surprising that not that much capex is required to increase capacity by 150%.
Often such small cos keep inventory in factory. By creating a centralized hub they would be able to utilize existing space at factories and would enable them to do brownfield capex.

Having said that, all of this is just speculation on my part. Best way to get an answer would be to reach out to the management or join the August 18 agm and ask this question.

Another possibility is that this is only phase 1 of the capex and expansion to 250% capacity might take more time and money than we think.

RajeevJ · June 26, 2021, 4:14pm

To my mind the total proposed expansion, both for MIDC plant as well as TRP plant, put together, is to the tune of about 40 to 45% of existing capacity (including de-bottlenecking), which itself is substantial. Post expansion the capacity would go to 270 lakh belts & 4.12 lakh sleeves per year from the existing capacity of 180 lakh belts & 3.39 lakh sleeves. This is my understanding of the issue.

vivekchat · June 27, 2021, 9:09am

Yes that seems more likely to me as well. However the announcement states that the proposed capacity addition is 270 lac belts per year and 4.12 lac sleeves per year

SUNRAY · June 28, 2021, 6:49am

Sahil,

Thank you for your indepth analysis. Are your concerns about the auditor quallity resolved in your mind? This has been of concern to me and would appreciate further thoughts from VP readers.