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.