Excellent set of numbers by PPAP both YoY and QoQ.
Disc - I hold, not a buy/sell recommendation
March 2017 Conf Call Notes
Exports
Currently exports contribute to 10% of sales and products are exported to Japan, Europe, Venezuela, Brazil etc. The exports are not directly done by us but by our customers (Nissan, Toyota, Honda, Renault).
Customers
The revenue split from various customers is as follows
It seems that Hyundai wants to localize parts for their models to remain competitive. Currently these parts are supplied by their Korean vendors who export these parts to India. So Hyundai is testing waters with Indian vendors. We have got business for their two models, namely Eon and Creta. For Eon, we have commitment of products for entire production.
Hyundai is second largest seller of passenger cars in India and with acquisition of Kia and its entry into India, they are looking to sell 1 million cars per year. Hyundai remains an important customer to enable/accelerate growth story of the company.
We deliver 7000 Rs worth of products per model in Honda. The cost of sealing products supplied to MS per car is 1200 Rs.
Company is supplying products SML Isuzu in LCV segment and to Suzuki Motors in 2 wheeler segment.
Injection Molded Products is a tough business with a lot of competition. The location of plant w. r. t. customer is very important in this business. Shipping these parts from Noida location to MS was noncompetitive. Now company is in the process of setting of plants in Patherdi, RJ and Gujarat. With these plants, the company is looking to sell injection molded parts to MS as they are competitive.
Rubber Sealing products are sold from JV. We are currently supplying three models of MS - Celerio, Baleno, Vitara. We are also supplying to two models of Toyoto - Fortunner and Crysta.
Tooling revenue is linked to launch of new car model and revenue is lumpy. As model launch schedules shift, the revenue recognition will also shift.
Margins
The rise in EBITDA margins are due to all round effort in all the departments and similar margins projection for FY18.
Capex and Capacity Utilization
The current consolidated capacity utilization (sealing + injection) is at 70%. The capacity utilization of sealing business is around 65-67%. The capacity utilization of JV is less than 40%. The company does not foresee any additional capex requirements in FY18-19 except for maintenance + ongoing capex (30-35 Cr). All the capex requirements and loan repayments would be met through internal accruals.
The plants at Chennai , Pathredi, Gujarat would be operational in FY18. Bulk of the capex is geared towards creating infrastructure. The company is looking to shift existing idle/freed up production machinery to these new locations.
The non-auto business is temporary in nature and aim is to fill up idle production capacity. The margins are much lower in non-auto business.
Disc - I hold, this is not a buy/sell recommendation
Another good set of numbers by PPAP in Q1FY18 â
Some notes -
Q1FY18 Conf Call
Industry
There was double digit growth in passenger vehicle segment in Aprâ17 & Mayâ17. Sales slowed a little in Junâ17 due to launch of GST. The growth returned to 10%+ in Julâ17. There might be double digit sales growth in the PV sales in FY18.
Revenue
Part sales increased by 11% in Q1FY18 compared to Q1FY17. The sales got a little impacted due to inventory reduction due to GST. The tooling revenue was at 5.33 Cr in Q1 FY18 compared to 12.1 Cr in Q1 FY17. This is why the total sales are shown to be flat.
Employee Costs
The employee costs are highest in the industry. This is due to two reasons -
New Plants
Gujarat
The sales will start from Septâ17.
Chennai
The plant setup is complete. We are working on getting approvals from the customer (Nissan), hope to complete this by year end.
New Customers
The current part supply to Hyundai is done from Noida plant. Eventually supplies for Hyundai will be delivered from Chennai plant. Started supplying parts to Suzuki motors. The cost of the parts put together is around 400-500Rs. Many global car players have set up International Purchase Offices (IPOs) in India and we are working on developing relationship with them.
PPAP Tokai India Rubber (50% JV)
The parent company is has expertise in plastic sealing systems. In order to develop rubber sealing system products, the company has formed JV with Tokai Kogyo with above name. Although the rubber market is much bigger than plastic market, the competitive landscape is different. The company has raised equity investment to ~48.5 Cr from 37.5 Cr last year. There is no further need for capital in JV. The business registered turnover of 50Cr and it has turned around and has reported positive cash flows. There is a new facility coming at Surajpur, UP. The capacity utilization of JV was around 40%.
Some misc. notes from FY17 AR â
Debt
The term loans from ICICI & HDFC are at rates varying between 8.9% to 9.9%. Further the company has received the loan of 13 Cr from The Pradeshiya Industrial & Investment Corp, UP. This loan is interest free and needs to be repaid in single installment after 7 years. The first tranche of 8Cr was disbursed on 29/10/2015 and second tranche of 5Cr was disbursed on 27/12/2016.
Employees
Total number if employees at the end of FY17 were ~1014. The company claims to be following Toyota model of training. From AR, it seems like employee training programs might be pretty decent.
Disc - I hold at an average price of 138, No transactions for last 18 months. More than 5% of portfolio. This is not a buy or sell recommendation. Investors are advised to do their own due diligence. I am not a SEBI registered analyst.
thanks for detail write up of this company. I have a few questions about this company and will appreciate if you can answer those.
So currently 80%+ sales comes from two vendors - namely Maruti Suzuki (~45%) and Honda Motors. I think Maruti Suzuki occupies formidable mind share in India and I feel sales will continue to grow at double digit rate. PPAP supplies 90%+ sealing requirements of MS. Honda sales were stagnant till FY16 but post the launch of new model of Honda City, I feel Honda is also doing better. I think 15% kind of YoY sales growth might be assumed.
The biggest optionality or moniterable remains the progress on Hyundai + Kia deals. Hyundai + Kia is second biggest car seller in India with 1 million cars a year. A design win in one of the best selling models (like i10 or i20) might take revenue to the next orbit.
I think further scope for margin improvements might be limited but management has said current margins are sustainable. The margin improvements are combination of decreasing RM prices and improving operational efficiencies.
No idea about ROE in this industry and I think ROE of the company will continue to remain low due to lower asset turnover.
Like I said 15% YoY growth is a given with current capacity. For me it was a proxy play on MS + Honda and undervalued bet (buying price was below book).
Another optionality is rubber JV. The addressable market in rubber segment is much bigger but company is yet to make strong headway into that market.
Disc - I continue to hold, no transactions in more than 18 months.
Just want to add another source which may be helpful to this thread⌠Monthly sales of cars is tracked here This link shows August sales but similar threads can be found on this website with analysis.
Any updates ??
Look at the delivery volume since last 10 daysâŚ
Something is happeningâŚ!!!
Maruti vendors grow much faster than what they guided earlierâŚ
It will directly impacted revenue nd profit growth of PPAP AUTOMOTIVE LTD
c237dfc6-a0c8-45a7-ba4a-e38896094f8b.pdf (1.3 MB)
PPAP AUTOMOTIVE posted decent set of numbersâŚ
Another good quarterly result by PPAP â
Q2 FY18 Conf Call Notes
CUSTOMERS
CAPEX
PLANTS
Chennai
Gujarat
RUBBER JV
OPPORTUNITIES
OTHER
Disc - Invested. No transactions for 18 months.
A Shapshot of the Financials from Screener.in
Now, for a company which has Operating profit margins > 17% for the past 2 years, the ROE of 7% (FY16) and 11% (FY17) is very low. What could be the reasons for these
Now are these Inv and F.Assets helping the company generate the revenues. If I look at the F.Asset turnover ratio - it is pretty low @ 1.6x (FY 16) & 1.8x for FY (17). One reason for the low F.Asset turnover could be idle capacity. This capacity when utilized effectively will help company generate higher revenues. However, Concall notes above states that the co is already @ 80% capacity utilisation. Moreover the max it can stretch in revenues with the existing infrastructure is 450 Cr in revenues (31% above FY17 revenues of 343 Cr). F.Assets turnover ratio can max go 2.29 times ( Max Revenues / Avg F.Assets. i.e. 450 Cr / Avg of (194 Cr, 196 Cr). Will that be enough? Lets look
Now, How will the ROE look at 450 Cr revenues.
Lets assume the Co is able to clock 10% Net Profit margin on Max Turnover of 450 Cr.
So, we get the Net profit @ 45 Cr. (450 Cr x 10%)
My Networth as on FY 17 is 232 Cr (14 Cr + 218 Cr)
So, my ROE is 19% - (Significant improvement from 11% as on FY 17).
**My Queries:
How long will it take to reach the revenues of 450 Cr (3 Yr Sales Cagr is 12%: 5 Yr Sales Cagr 13%). based on historical growth rates - it will take them slightly more than 2 years to reach these levels
What happens post 2 years. How is the company geared for incremental growth - what will make this company reach the 1000 cr revenues (as was cited in one of the articles earlier)
Are the valuations reasonable -
Trailing 12M Valuations - 800 Cr (Mkt cap) / 24 Cr (PAT) = 31x
Curr Mkt Cap (13th Dec) @ 800 Cr with 2 Yr forward PAT of 45 Cr = 18x 2 year forward.??
ROE= (Net Profit/Sales)(Sales/Total Asset)(Total Asset/Shareholderâs Equity)
So, direct effect does not come from inventory or debtors
Usually, high debt means high leverage and ROE can be improved by higher leverage but that may not be a good sign, that is why we look at return on capital . So, here, for sure, being low debt to equity , leverage is not contributing to ROE.So, a higher ROE could be achieved only from either higher PAT margins or higher asset turnover
Here, asset turnover is relatively low compared to peers. To highlight same, I have taken companies in similar business working around similar PAT margins. So, you can see , companies having better ROE have either better assset turns or they are highly leveraged. Also, you can see the ratio net block/total asset is around 59% of PPAP which means significant assets are net fixed assets. Also, the ratio is almost similar for 3 years and also you have mentioned based on concall capacity utilization as 80%. This means this is a business where assets are not being churned frequent enough to generate so much revenue that ROE can increase even at 80% capacity. The underlying assumption I am taking is whatever company is producing at 80% capacity, it is converting all that into revenue
Below is the chart to highlight the same:
Also, I have provided at the end of chart a comparative means which says most of competitors have better asset turns and they r relatively higher leveraged and hence resulting mean ROE being higher than PPAP. Also, looks like PPAP busniess is relatively more asset heavy in terms of net block contribution
Saurabh, you are wrong in assuming that changes in inventory and account receivables do not affect ROE.
Let us think intuitively first, both inventory and Acc. Rec. increase/decrease is a capital drain/gain respectively. That is why we have business models of Amazon, HUL etc. working on -ve working capital with high ROE while the opposite is true where high inventory requirements of certain business models and longer Acc. Rec. reduce the velocity of cash and in turn reduce ROE.
Now letâs think about it quantitatively, in the Du Pont analysis you have given, both Acc. Rec. and inventory form part of the Total Assets figure which seems to cancel each other out, but this added capital drain/gain is adjusted in the shareholderâs equity figure which is in the denominator. So any increase/decrease in inventory & Acc. Rec. increases/decreases SE required which in turn decreases/increases ROE. (In a debt-free business).
Now debt can be used to fund these capital drains and that is where ROE increases despite higher capital usage, just as you have mentioned.
You are right. Actually, I used wrong in choice of word âdirectâ. Did not say it does not depend but said does not depend directly. But i think this is wrong to say as the effect is derived. However, as fpr 3 levers of dupont comes from the points you mentioned. In order to show comparative difference at asset turn level visible, i did not go to derived level where inventories and receivables would play a role. Also, the point where net fixed assets were 59% of total asset are net fixed assets and higher than overall mean gives an impression that receivables (and that was intent to check this metric) may not be the reason though I have not deep dived. Also, in the end, I am providing the assumption is all asset stress is converting in revenue not inventory else ROE would get impacted. So, did not mean to say inventory/receivable does not impact ROE but should have used a better word than âdirectâ and may be should have framed âhas a derived effect on ROE through following leversâ as you beautifully highlighted and then have gotten into details.
Thanks for highlighting 
. However, what is your view on key reason behind low ROE? I might have missed something or may have interpreted something wrongly. So, glad to know your views
Excellent points raised by both Saurbh & Abhinav. Saurabh - I loved your peer comparison analysis highlighting leverage and Asset turns for companies. Abhinav - I loved your point clarifying how debtors & inventory affects the RoEâs - specially the intuitive way followed by quantitative explanation - it helps bring forth more clarity.
Now - there are 2 ways asset turns can improve
Co reaches the 450 Cr revenues with existing infra - as co has guided. This will result in the revenue jumping from 343 Cr to 450 Cr (as I had highlighted earlier). However, post this the co. will have to incur capex to grow further.
Co gets into higher value added products, thereby sweating the existing assets better. In such case, incremental capex may be postponed. This is where we need to dig deeper. The key questions to ask
a. What is the Coâs wallet share for key customers. I read earlier that for Swift - the company has a wallet share of Rs 1300. What is the same for Honda and others
b. Company has been supplying to Maruti since 1985. Over the past 30 yrs - why is the wallet share been so low. How will this change going forward.
c. While addition of new customer reduces the customer concentration - it also implies that the company has to devote different moulds / dyes for each new customer, as the shape and products would be different for different cars. How does this impact the capacity utilization, as the lead time for change in dyes will reduce the production capacity.
d. Since the OEM will already be purchasing some parts from some other vendor - what will make the OEM, start procuring the parts from our Co. Why will it not source the same from the earlier vendor. What drives their decision to change vendors?
e. What is the Coâs strategy - beyond the coming 2 years. Capex plans / Revenue growth.
Getting answers to the above will help us understand the biz much better. Pls add to this list / try and address these to the management.
Ronak, great set of questions and in the right direction.One more thing, in your ROE calculation, you are taking sales/avg .net fixed asset (194,196) as asset turnover. I think, denominator should be total asset . i ve taken 353 for fy17 instead of taking avg though i understand rationale for averaging. so,even at 450 cr, asset tirn will be 1.27. So, keeping other 2 constant, it will be 13.5% from 10% in FY17. So, ultimately only point no 2 can lead to really respectable ROE value in long run as I am not sure current margins have any benefit coming from raw material prices.
I am not invested in any auto ancillary ,so, I do not have much idea. However, considering one of insights from investment in Tata Elxi, i can say over last 10 years, the share of cost of electronics in Car has gone up from 5-10% to 15% (trend recollect not initial no) and in next 5 years this would reach 20%. This data is insufficient to derive any meaningful inference but highlights some pressure points where without offering something new,innovative,value added, growing wallet share might be challenging.
Q4FY18 Conf Call Q&A and Notes
Q: What is the Part sales for last Q3FY18
A: Part Sales 87.37Cr, 7.16Cr for Tools
Q: Growth of Part sales is less. Why?
A: Industry growth itself is 5.5%.
Q: Update on Hyundai. Starting to cater to Creta? How much revenue has come in this Qtr
A: Less than 1% to topline - only from EON. Expecting this to grow to 3-4% of revenues with addition of 2 more models.
Q: No CAPEX for FY19?
A: Yes only maintenance CAPEX this year⌠Mainly for maintenance. Range of 25-30cr. But this may change depending on the customer/new business
Q: Broader thought process on the JV and other collaborations front
A: Aim is for Growth prospects in expanding the existing products. Increase the business per car
Q: Gross margins and EBITA margins sequentially YOY basis has contracted significantly. How much tax is owing to outsourcing costs coming to raw material or how much from increase in actual raw material costs?
A: Tools are contributing significant to raw material costs. Material costs in general have not changed and at 50%.
Q: EBITA Margins at 21.3%. Do we intend to maintain this or will improve this and what will be the levers for it.
A: Can maintain these margins, fairly confident. Headwinds are in terms of crude and currency, which we are watching but not impacting as of now. Also our efforts in improving the efficiency of material utilization will balance any impact from head winds.
Q: How much of raw material imported
A: 25-27%
Q: Some more light on new customer MG Motors OEM. How are we going to supply it from which plant
A: This OEM will launch one model currently. Will be supplied by Gujarat location. Will start with Injection parts, customer has shown interest in ceiling systems as well. We will be supplying around 11 parts for them. Content per car is not finalized as we are still at preliminary drawings.
Q: Status of new plants: Gujarat plant and ramp up of Chennai
A: Gujarat: 2 facilities, one is own and other is rental. Currently supplying to swift from rental plant and plan to move to own. Will be supplying to Baleno as well. End of this year we will be supplying all parts of MSI from this plant.
Revenue guidance from Gujarat plant: Injection business will give 13-14Cr. This number is expected to go up as some more new parts are in discussion
Chennai plant: Currently supplying from Noida to Chennai. First priority is to localize this in Chennai. Hyundai and Kia will be serviced later by this plant as second priority.
Q: Scaleup plan for JV for 2-3 years.
A: Supplying to Toyota Yaris now. Growth is going to be fairly good. Existing infra can meet 100Cr topline target. Utilization at this point at 55-60% and comfortable. Once we reach close to full utilizations we will have similar margins as standalone.
Q: Are you able to pass on the increase in raw material prices to customers?
A: Gross margins has come down due to high tool cost in material cost. On part business, the material cost will remain similar to what it was earlier. In terms of passing the costs to customers, we think we can maintain the same costs by improving the material utilization efficiency (no clear answer)
Q: Employee costs is high compared to similar industry. Why?
A: We are print to build company where the whole activity in taken up in house. Special purpose machines, design team etc - complete integrated player. Also the company has expanded from NCR to PAN India - so employee costs is growing at a higher rate than before⌠All these factors have resulted in growing employee costs. As our business stabilizes, we expect the rate of growth of employee costs as a percentage of sales should come down
Q: Will the profit growth sustain at 10-15%?
A: As we demonstrated so far, we will continue to grow at a rate higher than industry as business grows.
Other Notes
Existing OEMs: Maruti, Honda, Nissan, Toyota, tata, GM, Ford, Mahindra
New additions: Hyundai for EON, MG Motors India (owned by China based Sia Corp)
Segments
Currently in PV Segment
Expanded to : LCV and 2 Wheeler
⢠LCV: ISUZU, Bharat Benz
⢠2 wheeler: Suzuki, Honda
10% of the products are exported by OEM customers
Facilities
Greenfield facility in Gujarat supplying to New Swift& Baleno
New facility in Chennai supplying to Suzuki (target to localize the parts being shipped from Nodia)
PTI (JV Company) - shown growth of 33.8% in FY18 - Sealing products
Open to Inorganic expansion to de-risk the business - Suzuki 2 wheeler is an example
Official SIAM Industry Figures
FY18 numbers of overall market
⢠5.5% YOY increase in PV vehicles
⢠10.2% YOY increase in CV
⢠16.1% YOY increase in 2 wheeler
FY19 forecast - PV grows at 7-9% on back of continuing rural demand
Expansion/Capex Plans
⢠75-80% Capacity utilization - room to grow without new CAPEX
⢠Capex is being met by internal accruals
⢠50.75 Cr CAPEX in FY2018. Now new requirement in FY2019
PPAP AR 2018.
Q1 FY19 UPDATE
PPAP reported good set of numbers for Q1 FY19.
Results:
Investor Presentation:
CONF CALL
Margins
The management claimed than current EBITDA margin of 19-20% are sustainable.
There is approx -8Cr of change in inventory this quarter which makes numbers look confusing & good. The management said that the inventory build up was towards the molds (tools). The molds inventory tends to rise whenever company works on newer models & customer buys these molds once commercial production starts. The rise in change in inventory is probably a positive thing as it indicates new business development.
In the context of above, material costs have remained in the range of 48-50% over last few quarters except for Q4 which has large tools sales. Management claimed that contracts allow them to pass through RM costs & forex volatility with some lag.
Capacity Utilization & Capex
The overall capacity utilization stands at 75-80% (Extrusion/Sealing at 70% & Injection at 80-85%). The company is not looking at any capacity additions in FY19. The peak capacity utilization can be up to 90-95%. Adding machinery takes 3-6 months, creating new infrastructure from scratch takes longer.
The company has spent 15Cr of capex in Q1FY19 & FY19 capex is budgeted at 30Cr.
Growth Strategy (New Products x New Customers)
The topline growth on Q1 was largely driven by volume growth.
The company supplied instrumentation panel for SML Isuzu CV range (New product for new customer).
The company has leadership position in sealing systems with Maruti & Honda, the company started supplying sealing systems to Hyundai. (Existing product for new customer).
The company has limited presence in injection molded products in Maruti. Pathredi plant & Gujarat plant is aimed at selling more injection molded parts to Maruti (New products for existing customers).
The company is also discussing with Volkswagen for their model through Skoda.
Disc - I continue to hold & have up averaged in last 90 days. No transactions in last 30 days. This is not a buy/sell recommendation. Investors are advised to do their own diligence.
Attached is the excerpts of an Interview my friend did with the with CFO of PPAP Automotive â Mr Manish Dhariwal on 12th Dec 2017.
Apologies as it is a bit dated - but thought it was worth sharing.
Co was incorporated in 1985 - started with Plastic based automotive sealing products. Maruti was their key customer even then.
Entered into technological tie-up with Tokai Kogyo Japan in 1989 for sealing products
Entered into technological tie-up with Nissen Chemitech for injection moulding products
Entered into JV with Tokai Kogyo Japan in 1912 for the rubber based sealing products
Co today is leading manufacturer of automotive sealing products - 90% of Marutiâs entire sealing requirement and 100% of Hondaâs
99% biz from Passenger vehicles segment.
Maruti account for 48% / Honda 32%. Total 80% from top 2 customers
Maruti is the largest customer followed by Honda
Itâs wallet share in a Maruti car comes to roughly 1000 to 1200 per car. Maruti sells 14 Lakh car in a year. Approx revenue 168 Cr
Itâs wallet share in a Honda car comes to roughly 6000 per car. It sells about 2 Lakh cars per year. Approx revenue 120 Cr
2a. Why OEMâs would source such a large qty from single supplier?
90% of all Marutiâs + 100% of Hondaâs sealing product are sourced from PPAP.
OEMâs are no longer shy of sourcing it from single supplier. They conduct strict quality control checks in each of their suppliers facility
to ensure highest quality standard is maintained.
given to each of the suppliers
Injection Molding segment would be @ 80%+, sealing producst would be lower @ 65% to 70%.
Consolidated utilization would stand @ 75% for itâs parts business i.e. Injection Moulding + Sealing prodcuts
Co. turnover for FY 17, stood at 343 Cr. The max it can reach with the existing facilites is 450 Cr for itâs parts business
Itâs tool division, the revenues are lumpy and dependant on mass launch of new products
While the company does not give any revenue guidance, the max it can grow is 30% from hereon with existing facilities
contribution is miniscule.
Co has bagged an order from Hyundai - 2nd largest PV supplier for some of itâs models.
Co will also supply to SML Isuzu from itâs Chennai plant
For every new model launch, a new mould / dye is required, as each model will have a unique shape and size.
The company associates with the OEMâs right from the stage of planning for the new model to commercial production, to understand
the product requirement. Through the tools division, it manufactures proto-types of the various parts
the parts on mass scale, which is accounted for in the Parts business (Injection Moulding or Sealing Products)
launch of new products
Tata Motors, Honda & Maruti for new launches.
The company has clarified in itâs concall that 18% kind of margins are sustainable.
Co does not have any pricing power, and the entire margin is dependent on Operating leverage + cost optimisation.
Co admits that it has low ROE / ROCE, inspite of high margins, due to low asset turnover ratio.
With already 75%+ utilization, there is not much scope for asset turns to improve.
The co is therefore not aiming at the volume growth, but growth @ higher margins.
CRISILâs rating upgrade is the recognition of the improving financial position of the company
They are aiming at A1+ rating from CRISIL, which will help them raise funds CPâs mkt at much lower rates
Currently, they are banking with 4 Bankers, and HDFC is offering them loans at MCLR (~8%)
They say there is a further scope of reduction to 6.5%
The ability / skill set to develop new parts will be the deciding factor.
They have the necessary manpower / resources in place to capitalize on the opportunity.
Attrition rates are very low.
