Pix transmissions - low profile microcap company

Yes that is healthy as long as growth comes, and was essence of post

Last I checked, Mayur have no returns for 7+ years horizon till date - compounder as per my limited understanding don’t have such character , Mayur vs Balkrishna from the point it got listed in chart , and point of Post was to relate Pix and Balkrishna, and possibilities of Pix following path of BKT - rest my case here - (BTW am invested in all three of these - allocation differs)

Yes, that’s the thesis for most of us as well. Growth will make investment heavy biz look leaner and aligned to growth, doubt if working capital can/will change drastically, but as top line grows, it would look healthier in proportion.

Invested

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There are some fantastic insights in the latest concall held by Gates in February last month that builds a longer term conviction in this business. Gates’ Q4FY21 concall.

The most interesting bit of the call was their discussion on the opportunity in the EV space.
It was Nil for them in 2017 and is 4% of their $2.2 Billion Power Transmission business currently, that is close to ~$88M or >650cr in INR terms. The largest organised player globally has 1.4x of PIX’s TTM revenues from EV segment.

They will unveil their plans on the EV business on 8th March where they see a significant opportunity and have a very strong pipeline.

Link to register for the event.

They are particularly more excited about the Replacement Market (PIX is VERY strong here) as EVs have a longer lifecycle than ICEs

Other updates on the current business scenario-

They continue to witness strong demand. Few snippets on demand and channel inventory

Raw Material situation is bad but it has stabilised now and is starting to get better. They have taken multiple price rise to combat RM issues and may take further price hikes.

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Few interesting slides from their latest presentation.

Insights on future application of Belts-

According to their estimates, this is a $36B fragmented market. This is a big number. Interesting to note that >60% of their revenues is from the replacement market and their mid-term target is to maintain that.

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And finally, a slide on EV where they have given their mid-term targets of $250 Million for the Electric Mobility and Recreation business.

Disclosure: Invested.

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The Indian Rubber industry is poised to grow rapidly. The industry comprises of both natural as well as synthetic rubber which compliment each other, in that most rubber products contain a combination of both. The share of synthetic rubber in India is about 35% as compared to 65% globally. Not only are we consuming all the natural rubber that we produce, we are a net importer of natural rubber. As technology improves, the use of synthetic rubber in the mix will only go up. The Govt., aware of this, is vigorously trying to promote synthetic rubber due to the enormous export potential of rubber products. India’s per capital consumption of rubber is only about 1.2 kg as compared to about 8 kgs in China & over 10 kgs in the industrialized world. As the Indian GDP grows, the rubber consumption is set to grow disproportionately.

Attaching a link to a recent article on the rubber industry & various companies in the sector, that is quite informative. Of all the companies discussed, Pix perhaps enjoys the highest operating margins, indicating that it is the least commoditized in its products.

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Pix’s Logistics Hub is now functional

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Lot has been told about inventory and working capital challenges in Pix biz model,with centralized WH commenced, it should help improve on both parameters

Some advantages being

  • Space optimization
  • Inventory count visibility real-time vis a vis backlog
  • high moving / high value vs low moving/low value based decision for stocking
  • faster turn around time for delivery ( Receivables clock starts early )
  • Reducing wastage

Logical would be to have warehousing systems integrate with ERP to have end to end visibility, per AR ERP implementation was done under Amrapal sethi credentials.

Q1-Q2 23 onwards it should reflect in numbers. If working capital optimization is visible ( thus cash flow), more so reasons towards re-rating.

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Listing on NSE

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They have created a nice and detailed Virtual experience center on their website.

https://www.pixtrans.com/vec.php

I just hope company starts to do concalls and/or investor presentation after their NSE listing.

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Margin impact. margins down similar to Gates Q1 (due to Covid related supply disruption and increase in logistics cost). Gates has guided for margins inching up in coming quarter on normalization.

Overall seeing how the Q4 was volatile even for large companies, a stable execution on topline and record revenue.

views welcome

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Numbers dont look encouraging to me. There is no growth in revenue on YOY basis, and there is significant hit in the margins.
This is a play on capex revival but it is not getting reflected in the numbers. And at this level, it doesn’t look undervalued.

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From a margin front, the results were on expected lines. See below chart on Gates’s Adj. EBITDA margin for their power transmission segment.

Normalised margin is around 21-22% mark, and they are currently 3-4 percentage points below the normalised margin. So Pix can also expect to see a normalised margin of 25% (without including the upside from their logistics investment).

What I find concerning is the flattish revenue growth (y-o-y) for two consecutive quarters. According to Gates, growth should revive to high single digits, and maybe Pix can grab a bit more share to grow at low double digits for the rest of the year - perhaps we won’t be seeing rapid growth of 20-25%+ this year - would be great to hear views from @sahil_vi and @RajeevJ ji.

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Cash Conversion cycle seems to be too high (275 day). While the Operating margins have improved over the period but the CCC have deteriorated due to high inventory days which means they are finding hard time to clear their inventory. Any thought on this would be appreciated.

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Or maybe CCC has increased because exports as a percentage of sales is increasing

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no, it is because of rise in inventory. this indicates that headwind will continue for at least 1-2 quarter.

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Pix Q4 numbers optically seem to be a little below expectations, with margins coming under pressure. This was more or less along expected lines, with the increase in the RM prices. With RM prices usually being passed on only with a lag, the margins are expected to return to normal over the next quarter or two.

The important issue is that the story is very much intact. With the logistic hub ready & operational, the plant capacity increase is well under way. I gather that export demand is only getting better, & it is very likely that share of exports in the total sales keeps rising with each successive quarter & in a couple of years one may well see exports forming 65-70% of total sales. This increasing trend & focus on exports augers well for the Co. as the export market is many times the size of the domestic market, & once having made a break through, the stakes continue to get bigger & for an appreciable period of time.

I expect sales for the current year to be in the vicinity of 600 crs, but even if it ends the year closer to 550 crs, at current prices & with profitability returning to normal going forward, means that the stock is currently available at a multiple of around 10, which is the lowest that I can remember for quite some time.

Six months from now, the current price may appear to be quite a bargain!

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My view on estimated projections and valuations

FY’23
20% organic growth over FY’22(assumed) + 75% Utilisation of incremental capex.
We are taking only 75% utilisation as the capex will be done by Q1 FY’23, thus utilisation for remaining three quarters comes at 75%.
Incremental revenue from incremental capex :
75% of 60 crores at 1x asset turn: 45 crores
Total revenues: 600 crores
EBITDA margin :25%
EBITDA : 150 crores
Other income: 10 crores
Interest : 15 crores
Depreciation :25 crores
PBT: 120 crores
Tax:25%
PAT: 90 crores
Currently trading at 13 times FY’ 23 earnings which is in line with historical valuations, hence do not see great upside or downside from here.

The upside trigger here may be disproportional increase in export revenues and/or increased domestic sales on the India capex story, both of which are unknown yet and hence havent been factored into my estimates.
Views from other participants are welcome to know more.

Disclosure: Initiated Small tracking position at current levels.

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