Sandhar Technologies - An emerging market leader

I came across a really interesting story in the auto-anc space, and wanted to share it with board members.

What do they do?

Sandhar Tech. started in 1987 as a sheet metal supplier to Hero. Since then, they’ve grown to offer a multi product catalogue, supplying 79
global manufacturers and have market leadership in a few product ranges.

The product mix has remained fairly unchanged in the last two years. (Note, they disclose their largest segments, so the balance is in others.)

Products Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21 Q4FY21
Locking Systems 0.22 0.22 0.21 0.21 0.21 0.21 0.22 0.20 0.20 0.22 0.21 0.21
Vision Systems 0.09 0.10 0.10 0.10 0.10 0.09 0.09 0.09 0.08 0.08 0.08 0.08
Sheet Metal 0.15 0.12 0.12 0.11 0.11 0.12 0.11 0.11 0.13 0.13 0.12 0.12
Offroad Heavy 0.13 0.12 0.13 0.14 0.14 0.12 0.12 0.13 0.08 0.10 0.15 0.15
ADC 0.17 0.16 0.16 0.17 0.17 0.19 0.19 0.20 0.25 0.22 0.20 0.21
Assemblies 0.19 0.14 0.15 0.15 0.16 0.17 0.14 0.13 0.11 0.10 0.10

Please note that locking systems, offroad heavy (OHV) and aluminium die casting (ADC) form the largest piece of the pie.

Segments Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21 Q4FY21
2W + 3W 0.59 0.59 0.58 0.57 0.59 0.61 0.60 0.58 0.58 0.61 0.58 0.57
PV 0.24 0.24 0.21 0.21 0.22 0.21 0.21 0.23 0.26 0.21 0.21 0.22
Offroad Heavy 0.13 0.13 0.14 0.14 0.13 0.13 0.13 0.14 0.11 0.12 0.16 0.16
Electronics 0.04 0.05 0.05 0.06 0.04 0.04 0.04 0.05 0.05 0.06 0.05 0.05

The 2/3 Wheeler segment makes up 60% of Sandhar’s revenue. They’ve made detailed disclosures of their revenue breakup across clients, most recently in Q2FY21.

Please compare this figure to the product supply image above to understand what Sandhar supplies to each of these clients, and you’ll see how they group into baskets.

How have they performed relative to the industry?

Sandhar’s investor presentations/concalls usually have a segment that talks about the industry, the OEMs they supply to, and the relative growth between the two.

Relative Growth Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21
Hero 9.40% 8.20% 3.10% -12.50% -16.70% -16.00% -18.00% -69.00% 7.00%
Sandhar (Hero) 18.70% 15.80% 10.80% -13.20% -15.40% -14.10% -19.00% -75.00% 0.00%
TVS 15.30% 15.40% 11.60% -1.00% -11.10% -13.00% -18.00% -77.00% -2.00%
Sandhar (TVS) 22.90% 27.30% 27.00% 15.10% 6.80% -0.70% -10.00% -78.00% 2.00%
Honda 3.90% 3.90% 7.40% -20.90% -35.20% -36.10% -44.00% -95.00% -18.00%
Sandhar (Honda) 1.10% -5.30% 1.50% -8.10% -35.20% -40.10% -49.00% -96.00% -17.00%
JCB NA NA NA NA NA NA NA NA NA
Sandhar (JCB) 163.00% 156.60% 125.30% 2.70% -10.80% -11.30% -18.00% -79.00% 7.00%
Bosch NA NA NA NA NA NA NA NA NA
Sandhar (Bosch) 8.60% 7.70% 5.00% -9.70% -4.70% -8.60% -8.00% -63.00% 4.00%
Royal Enfield 12.60% 6.10% 0.70% -18.50% -19.60% -15.40% -16.00% -69.00% -10.00%
Sandhar (RE) 18.40% 12.00% 10.20% -14.50% -8.20% 4.80% -5.00% -79.00% -9.00%
TRW NA NA NA NA NA NA NA NA NA
Sandhar (TRW) 7.80% 7.30% 4.30% -2.20% 0.10% -2.80% -5.00% -71.00% -8.00%
Autoliv NA NA NA NA NA NA NA NA NA
Sandhar (Autoliv) 39.50% 41.70% 26.40% -1.30% 12.10% 22.50% -6.00% -52.00% -2.00%

Since we know TVS and Hero form the largest share, here’s a chart comparing Sandhar’s revenue growth with client’s growth.

  • One notices that in upcycles, Sandhar’s business outperforms their client’s revenue growth. In downcycles, their degrowth is not as bad as their clients. This is evident in TVS more than Hero.

  • This data was disclosed in presentations only from FY19, so we only have data spanning 3 years.

On the industry level,

Segment Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21 Q4FY21 Q1FY22
Industry 2/3W 13.20% 11.90% 6.60% -9.80% -13.30% -12.50% -14.00% -73.00% -7.00% 14.00% 26.00% 117.00%
Sandhar 2/3W 20.20% 13.00% 16.50% -2.60% -7.00% -8.50% -15.00% -77.00% -0.90% 22.00% 57.00% 188.00%
Industry PV 5.10% 2.00% 0.40% -14.90% -18.90% -12.70% -15.00% -78.00% -3.00% 8.00% 35.00% 292.00%
Sandhar PV 7.90% 7.00% 5.60% -1.40% -9.40% -12.40% -15.00% -73.00% -2.70% 18.00% 35.00% 252.00%
Industry CV 37.10% 24.30% 16.10% -13.60% -24.80% -22.80% -30.00% -84.00% -23.00% -1.00% 43.00% 243.00%
Sandhar CV 34.60% 20.30% 12.20% 12.20% -42.40% -32.60% -30.00% -82.00% 37.00% 34.00% 75.00% 467.00%
Industry OHV 20.60% NA NA NA NA NA NA NA NA NA NA 106.00%
Sandhar OHV 75.40% 80.50% 70.40% 2.90% -11.80% -16.30% -21.00% -77.00% -4.80% 42.00% 99.00% 318.00%
Overall Industry 12.70% 10.90% 6.50% -10.50% -14.40% -12.80% -15.00% -74.00% -7.00% 10.00% 26.00% 138.00%
Overall Sandhar 23.40% 20.00% 20.00% -3.30% -10.30% -12.00% -17.00% -76.00% -0.30% 20.00% 56.00% 217.00%

Here’s how the overall industry comparison looks like without Q1FY22:


What is their business strategy?

They’ve gone from having five manufacturing plants in 2005, to 32 in 2017, and 43 today in 2021.

They had 12 patents published in 2017, here are some of them from the DRHP:

On date, they have 20 published, 24 filed and one granted. Published patents don’t give you as many benefits as granted patents, would be worth following the filings. I don’t have domain expertise in patents.

You can see this business strategy in play:

Their key competitors are:

In addition to this, they’ve done two things really well:

1. Increase wallet share from existing customers, intelligent choices in entering new products.

There’s one page in the Q2FY19 investor presentation that drives this home:

If you look at the investor presentations in the past, they list the new annuity business they’ve received, the new product launches, etc.

Their electronics division is very new, started only in 2019, and has a lot of headroom to grow:

More importantly for a forward outlook, they’ve won a lot of contracts in EVs:

2. Strong inorganic growth choices through acquisitions that then leverage existing client network.

From the Q1FY22 concall:

Management targets RoE of 22-25% for new acquisitions.

Financial Summary, Valuations, and Management Commentary

Taken from Screener.in

Management has guided 30% revenue CAGR over the next four years and margin expansion of 100-130BPS in FY22, expecting it to stabilise between 11-12.5% in the next few years. They claim this is from organic growth, discounting any contribution from new acquisitions. Detailed breakdown of the guidance across different segments is given in the latest concall.

As of writing this post, the trailing valuations are:

Sandhar Tech. Price/Sales Price/Earnings Price/Book EV/EBITDA
Valuations 0.82 19.4 2.19 8.87

The forward valuations are even cheaper based on how you see the guidance playing out.

Meanwhile the stock price has been languishing since the IPO:


Key Risks

  1. 50-60% of the revenue for Sandhar comes from two key clients. If TVS / Hero go bust, or these deals fall through, the investment thesis in Sandhar falls through.

Counter argument: Sandhar has actively been trying to diversify product basket and customers. They also have long standing relationships with these two clients.

  1. A downcycle in the 2W industry would lead to headwinds for Sandhar. I’ve indexed the 2W sales in India to Sandhar’s consolidated revenue. While Sandhar performs better than the industry in a downcycle, it still faces headwinds.

  1. There’s been some shuffling of management in the CFO position. Their longstanding CFO, Mr. Arvind Joshi resigned in 2019. Following this, they had an interim CFO for some time before appointing Mr. Aggarwal, a former VGL executive to the position for a tenure of 5 years. After only six months, he resigned. His Linkedin shows he hasn’t taken up a position at any other company since, so this could be due to personal reasons.

Investment Summary:

This is an auto-anc player with market leadership in a few categories. Their management has three decades of experience, and has led the company to diversify their portfolio offering, successfully mine clients, and make smart decisions to create new cash cows through inorganic acquisitions and product entries.

At present valuations, finding a company which claims to offer 30% earnings growth over the next few years at less than 1x sales looks to have a sizeable margin of safety.

There is no outstanding civil or criminal litigation.

Inviting all forum members to share their views, verify the possibility of management guidance, and point out red flags that I may have missed.


Disclosure: Invested in Sandhar Tech. Transactions in the last 30 days.

43 Likes

Excellent discussion of Logical Investor with @suru27

7 Likes

Strong commentary from management, some highlights:

  • Commissioning five plants, one was done in December 2021 and has started manufacturing. Three more will be done by the end of FY22, and the last one by Q1FY23.

  • Order book for these new plants are full, will generate around 800 Cr. of topline and need about two months to ramp up to full capacity.

  • Environment was tough this quarter. A combination of low footfalls, commodity costs, and chip shortages affected margins. Things on the ground are better, expecting normalcy by Q1FY23, impact is passed on with a 1 quarter lag. Double digit margins are never a doubt - the question is how high in the double digits. Anything lower than 12.5 - 13.5% is due to commodity prices, but this is the target.

  • Wonderful exposition on premiumisation - how they are/have moved from commodity offerings to much higher value add products, how components like lane guidance are new to the country, will first be a part of top end OEM models before eventually becoming commonplace, differing from component to component.

  • Exposition on their philosophy of client additions, how there are 60+ EV entrants, but they don’t want to talk about new clients for the sake of numbers. They are focused on those that can guarantee them 100 Cr.+ of annuity.

  • How they believe the topline growth guidance will be met through increasing wallet share and new products, rather than a two wheeler upcycle.

  • Exposition on JVs - Amkin will be profitable in FY23 (Had a loss of 3 Cr. in FY21), Kwangsung has started manufacturing in January and will see good numbers from exports.

  • A large number of their components like sheet metals are vehicle agnostic - can go into ICE or EV. However, there are a number of products which are exclusive to EVs - motor controllers, battery packs, battery management systems and will not go into ICE vehicles.

  • On components - there is no moat or value add in supplying an air pressure sensor. The key is that OEMs buy a basket of this technology from one or max two suppliers. Over time, margins will fall, but the differentiator Sandhar has is its tech partners - they have a 30 year partnership with Honda, set up an R&D center with their Japanese engineers in India. Customers will come to Sandhar as they’re familiar with Honda. This is true not just for Honda but several companies.

  • The last ten minutes of the concall are a joy to listen to - exposition from Mr. Davar on what the Indian auto industry went through in the last decade - from the numerous emission changes introducing shocks, to improvements in various safety norms, why the resale value of vehicles has jumped across the industry. How covid affected the purchasing power of people, and about the aspirations of rural India.


Disclosure: invested, transactions in the last 30 days.

18 Likes

too many resignation is a red flag. Apart from that the salary of key management personnel except the promoter seems very less. Too many RTP with subsidies and JVs ( I may be wrong , some one can throw light on this )

7 Likes

Most companies have a regular dealing with subsidiaries, it becomes an issue when there are subsidiaries that bleed cash- indicating a possible siphoning off. Or there are unnecessarily large number of subsidiaries. On a consolidated basis, the quantum of RPT is fairly low compared to rev/profits. Unless it rises in proportion to overall finances, it shouldn’t be a worry.

As for the resignations, Ravinder Nagpal passed away with COVID. Arvind Joshi had worked as CFO for more than a decade at Sandhar before resigning. Puru Aggarwal left to start his own business - though the really short stint at Sandhar is surprising. Narender Dogra still seems to work at Sandhar as AGM Finance - he was an interim CFO. Lastly, the CS was clearly an interim appointee - her LinkedIn shows that she didn’t quit until 2021.

9 Likes

Q4FY22 concall notes:

  1. New project roce will increase after ramping up

  2. gross margin & ebitda margin will increase going ahead: premiumisation back on track with getting enquiry, monthly increasing orderbook

  3. Future growth: April to few months firm visibility of firm scheduling of 25-30% increase. Indian automobile is far away from saturation. Growth will be driven by premiumisation+volume growth.

  4. Market consolidation in pain period: taken new projects for that due to period of opportunity. looking at a growth of 40% with confirmed orders.

  5. chip shortage: availability is getting better but with increased cost.

  6. capex: 350-400 cr for finishing new projects, 120 cr for maintaining existing assets. debt to equity ratio at most 1 (Debt level will increase).

  7. Margins to touch double digit this year without a doubt. As commodity prices stabilise. (Checked the zinc, copper, nickel price and found them correcting after March high)

  8. Growth will come from new businesses irrespective of industry growth. Between the lines: If industry growth happens earnings will explode

  9. Premiumisation: some products can go 4-10 times of present price.

  10. Conservative revenue growth: 35%

  11. No problem in taking new businesses. It’s just that we are choosey when it comes to picking based on roce.

  12. Debt: Going to increase this year. Earlier stated debt is peaked up because didn’t need to expand at that time.We have opportunities thrown at us like matured start ups. Needed to act quick within 4-5 months. couldn’t do that without debt. So these are like inorganic growths.

  13. Working capital loan at 4.5% rate. compared to OEM discounting of 7.5%.

  14. In fy22 sandhar grew by 25% but industry grew by 2% only. Most of the growth came from new products.

12 Likes

Have done some basic ROCE calculations for Sandhar.

Currently the company trades at a market cap of 1500 crores. TTM EBITDA of 193 crores, EBIT of 93 crores. Trades roughly 15x EBIT.

Inputs - 21% growth in revenue for FY 23, 17% for FY24. Assuming EBITDA margin to rise to 10% by FY24 on the eventual cool off in RM prices, and prudent capital allocation by management to only produce high margin products. Capital Employed(NWC+NFA) is dependent on the CWIP which might go higher than I estimate and reduce ROCE. The capital employed that I used is just an assumption here.

ROCE(calculated as its dupont form - OPM*Capital Turnover ratio) calculated are very rough estimates to understand the trend, which should be taken with diabetes-inducing grains of salt. Capital turnover ratio(Sales/Capital Turnover) are shown to be trending upwards as I do believe that utilization rates will turn up and sales will grow quicker than the capital employed, i.e ROIIC should be high.

Both sides of ROCE(OPM & Capital Turnover) will work together, and cause a disproportionate increase in ROCE, and lead to a rich CFO generation.

8 Likes

Very bullish outlook and growth guidance on the concall. Considering growth outlook, and potential margin expansion if commodity prices cool, it could be an interesting time ahead for the company.

In terms of Price/Sales - multiple is at lows (except COVID crash)

Even in terms of PE - not expensive on a low earnings base

Should be a good time ahead if the company can deliver into the concall promises of sales growth/better margins over next year.

Discl : Invested, biased

7 Likes

yes valuation wise margin of safety is present.
2w industry is also showing revival sequentially. Though far below FY19 numbers. PV already above FY19 numbers. 54% of sales of sandhar is from 2W
Here are sales numbers taken from FADA since last 6 months.
Blue colour denotes FY19 & Red colour denotes FY20.
image

From FADA May data

  1. Similar to last month, May’22 when compared to May’19 reveals that Auto Retail is still not on growth trajectory as overall retails were down by -10%. While PV and Tractors continued its positive run by growing 11% and 33%, 2W, 3W and CV are yet to show any signs of healthy run-rate (compared to precovid months) as they de-grew by -14%, -19% and 11% respectively.
  2. The PV segment which has already surpassed May’19 numbers is witnessing huge demand. Dealers are not being able to fulfill the same due to supply side issues. This has not only led to an increase in waiting period (ranging from 3 months to 2 years) but is also keeping the customers frustrated. Healthy booking and single digit cancellation shows that demand may stay put even when normal supply resumes in months to come.
  3. The 2W segment has seen slight improvement in overall sales when compared with April’22. While 2W EV sales were growing rapidly though on low base, various fire incidents across almost all EV brands has created a fear in the mind of the customer. This coupled with supply chain issues, has decreased 2W EV sales drastically from last month.
  4. The CV segment especially buses are showing good demand due to re-opening of educational institutions.
  5. Inventory at the end of May’22
    o Average inventory for Passenger Vehicles ranges from 15 – 20 days
    o Average inventory for Two – Wheelers ranges from 23 – 25 days

Disclosure: Invested

7 Likes

Posted good Q1 results. Revenue up 64.6% to 675Cr (vs 410Cr), EBIDTA up 76.1% at 54.4 Cr vs 31Cr and Net profit saw a big jump of over 500% at 12.7Cr vs 2.2. Cr. They also managed to better their EBIDTA margin by 0.5%. Can someone who has looked at the numbers more closely and understands this segment provide any additional commentary as to how good or bad these results really are? Thanks.

1 Like

For cyclicals you should not compare yoy. It’s better to use qoq. QOQ fall in PBT. company gave big guidance of 35% revenue jump this FY which is yet to happen. Hero is their biggest customer and sales of hero is not improving maybe that’s a drag.
Disclosure: Invested.

3 Likes

Below average results by Sandhar.

  1. On revenues. Flattish Q-on-Q. Aggresive guidance by mgmt hasnt yet played out. Although they have continued to do better than their industry overall.

  2. On margin front. A central part of my thesis is RM cooling off which has also continued to rise(not under managements control). Costs continue to be a drag.

Auto sector volumes look promising, in Sandhar’s case, 2W industry has not come back to its 2019 numbers yet. We might be poised for a cyclical upturn.
Over the next 2 years, RM prices should ideally cool off and margins can surpass 10% mark easily. IMO, if company can register a sales growth of 20-25% or higher for the year with 9.5%+ margins for FY23 with an auto upcycle, it could trade 1x price to sales.

Another thing to monitor is cost of debt. Sandhar has a levered b/s with 0.7x D/E(high considering ROEs here are sub 10%). Higher interest rates could visibly dent Sandhars P/L. Already interest costs have risen from 4 crores to 7 crores. For a not very profitable biz like Sandhar these costs will affect earnings by a lot. Will be interesting to see interest costs for Q2.
They have also depreciated 29 crores(I assume this would increase over the year) as against ~25 crores.


As against what I projected, depreciation qrtrly run rate is already up there, so looks like it would increase.

Key things to monitor here on IMO would be RM prices + mgmt execution on increasing wallet share. As mentioned, Hero isnt doing as well as TVS and M&M.

A few projects have been postponed. Prev qrtr vs Q1 FY23.


Overall still bullish over 2 years but RM continues to drag Sandhar. Waiting for mgmt commentary.

Disc - invested. Position sizing here.


Technically setting up decently, relative underperformance to auto index is shown. Important resistance at 265 or so. Higher low has been taken which is good.

5 Likes

Sandhar Technologies Limited

BSE: 541163 | NSE : SANDHAR | SANDHAR: IN

Sector - Auto Ancillaries | Industry - Auto Ancillaries

Cyclical, Growth, ROCE expansion.

Elevator Pitch: Depressed ROCE, OPM caused due to short term RM costs elevation(passed with 1 quarter lag) likely to turn up disproportionately on the back of higher OPM and sales growing quicker than capital employed.

Business Overview

Sandhar Tech is a diversified OEM supplier to mostly Indian Auto companies. Sandhar is the sole supplier/single-source supplier of lock sets and mirror assemblies to Hero MotoCorp Limited, TVS Motors Limited for motorcycles and Honda Cars India Limited. Moreover, it is a single-source supplier of wheel assemblies to TVS Motors Limited and Eicher Motors Limited (Royal Enfield), and operator cabins for excavators to JCB India Limited. Management has over 3 decades of experience in OEMs.

Highly diversified in product offerings, with locking systems and aluminum die casting (ADC) each contributed to ~21% of FY21 sales, with cabins (16%), sheet metal components (19%), vision systems i.e. mirrors (8%) and others (13%) following suit.

Concentrated client base especially in the 2 wheeler segment, with 50% of revenues coming from TVS motors and Hero Moto Corp. They do, however, have decadal relationship with many of their clients.

Segment-Wise revenue - 1. 2 wheeler - 54%, 2. 4 wheelers - 24%, 3. OHV & Tractors - 16%.

Geography Split - 86% from India, 14% from Spain(by subsidiary).

As the company services the Auto industry(particularly 2 wheeler and 4 wheelers) it is dependent on the cyclicality of the auto industry. I would classify it a shallow cyclical(although it does usually outperform the industry and its client’s performance). As far as the thesis goes, increasing wallet share and product launches will be considered the main growth levers rather than the auto cycle uptick.

Variant perception

  1. Company had guided for 30% growth in topline this year, which has not been achieved on account of general de-growth throughout the auto industry. They grew about 24% as against 25% for the industry. Such growth can now be expected for FY23 and FY24.

  2. Company also faced major RM cost headwinds with OPM dropping to an average of ~8% for FY22. Once RM prices(Zinc, copper, nickel) cool off margins are likely to flow into low double digits.

  3. ROCE also remains highly depressed. Stretched WC with NWC in FY21 being 212 crores which has now grown to 300 crores(note NWC = Trade receivable + Inventory - Payables). ROCE has also fallen from 9-10% to 8%.

  4. High leverage for the short term(D/E has doubled to now) so capital employed is stressed for the short term.

  5. Low float available in the markets. 70% with promoters, 16.5% in Institutional hands, only 14% in public. Also promoter, Jayant Dawar has constantly bought shares from open market, buying at average prices of 250 in the last year(1 crore in 2021, even more in previous years)

Strategy

  • Company is aiming to increase wallet share from existing customers.
  • Increase market share
  • New product launches
  • Increasing premiumization
  • Commissioning new plants(capex of 350 crores), 43 plants in 2021 and to commission 7 new plants in 2022 to bring it up to 50. Current utilization is only 60%. Many of the new plants are booked 100%. Can bring in 800 crores.
  • Company has a tie-up with more than 50% of new EV entrants. EV is insignificant to the company currently, but the growth of EV, company can hold itself.(<5%)
  • International Markets now have higher margins than domestic. New plant in Romania to help with a betterment in margin profile for the business.
  • Have taken debt inorder to capitalize inorganic growth opportunities. Stretched WC should get better and short term debt of 250 crores will be reduced.

Valuation

Currently the company trades at a market cap of 1500 crores. TTM EBITDA of 193 crores, EBIT of 93 crores. Trades roughly 15x EBIT.

|1172.888888888889x657.6419345186627

Inputs - 21% growth in revenue for FY 23, 17% for FY24. Assuming EBITDA margin to rise to 10% by FY24 on the eventual cool off in RM prices, and prudent capital allocation by management to only produce high margin products. Capital Employed(NWC+NFA) is dependent on the CWIP which might go higher than I estimate and reduce ROCE.

ROCE(calculated as its dupont form - OPM*Capital Turnover ratio) calculated are very rough estimates to understand the trend, which should be taken with diabetes-inducing grains of salt. Capital turnover ratio(Sales/Capital Turnover) are shown to be trending upwards as I do believe that utilization rates will turn up and sales will grow quicker than the capital employed, i.e ROIIC will be high.

Both sides of ROCE(OPM & Capital Turnover) will work together, and cause a disproportionate increase in ROCE, and lead to a rich CFO generation.

Assuming the company is valued at 15x FY24 EBIT(Margin of safety baked in price as ROCE’s are likely to turn up so I’d say conservative enough), 2835 crores could be a fair value for the business. This again is built on a conservative take on management’s guidance, but still this is an imprecise art and therefore please do your own DD to evaluate whether or not the business can achieve it.

Catalyst

This begs the question why the company is away from fair value.

  • I think the major catalyst for Sandhar is RM prices cooling off, as I believe the company has already delivered on top line growth as per the management guidance and will continue to do so. This should lead to a disproportionate rise in margins(higher than my numbers).
  • Once the company delivers a little less than half of their 615 crores of debt. 250 crores is short term with an interest rate of 4.5%. Upon paying it off the company should see a rise in ROCE’s even more disproportionately as capital turnover goes up.

Exit/Risks

  1. RM costs will be a major risk for Sandhar.
  2. If the company levers itself even more, it would be a huge red flag.
  3. Look out for capital allocation and where they choose to use their money for inorganic growth opportunities. Also read new credit rating reports when they come out.
9 Likes

This company was on my radar for some time but today decided to study it. A lot has already been written on this thread, so I won’t repeat the same points again.

Q2 FY23 highlights:

Reasonable growth:
Sales up 21% (Y-o-Y) and 11% (Q-o-Q)
EBIDTA up 1% (Y-o-Y) and 9% (Y-o-Y)

For FY23 revenue to grow at 35%, H2 should growth by 32% (Y-o-Y). Q2 growth was 21% (Q1 cannot be considered due to low base).

Company says Q2 margins were low due to “initial commissioning & other one-time startup expenses”. But numbers show that GM was depressed and above mentioned expenses do not impact GM. Clearly, company is unable to pass on RM increase (couldn’t see “1 quarter lag in passing on cost” for last 4 quarters).

EV business is very far fetched. It won’t come overnight. Need to focus more on current challenges in hand. Development timeline for all new EV Products have been pushed further by 1 quarter to 4 quarter.

Net Working Capital stood at Rs. 300 cr marginally lower from Rs. 307 cr on 31st March '22. This is impressive given the growth in business.

Debt: Company has not provided balance sheet for Q1 FY23. However, interest cost for Q2 FY23 is 20% more than Q1 FY23. So, debt has increased in Q2 too. BS is showing margin increase in debt which can be due to repayment closer to quarter-end. Repayment can be genuine or window dressing (anybody’s guess).

On upcoming project: nothing much has changed except company has started Phase 2 expansion at Halol, Gujarat (5 acre land alloted for the same).

My understanding (not repeating points already covered in thread):

Pros:
Detailing of business is impressive.
JVs are at South Korea, Japan & Taiwan (technologically advanced countries).
Improvement in working capital aided cash flow and subsequently lower need for fresh debt (although debt did increase).
very diversified business catering to multiple product categories.

Cons:
In Q3 FY22 con-call they said input cost is passed on with 1Q lag and double digit margin is doable. Neither of it has happened so far.
Customer stickiness is high but they are not indispensable. Each of the product they make has huge competition. (nothing extraordinary about their product).

Peer comparison:

Peer comparison Sandhar Minda Corp Fiem Ind Sundaram Wheels India Steel Strip Wheels Ucal Fuel system
Mcap (Current) 1372 4844 2396 10475 1490 2650 287
P/E (Current) 22.6 21.2 18.9 16.3 20.1 13.6 12.6
P/S (Current) 0.5 1.3 1.3 0.3 0.3 0.7 0.3
EBIDTA % (FY22) 9% 12% 13% 12% 7% 13% 13%
D/E (FY22) 0.7 0.4 0.1 3.3 1.2 0.8 0.6
ROE (FY22) 7% 14% 15% 16% 12% 22% 9%
ROCE (FY22) 8% 12% 21% 12% 12% 23% 10%
WC days (FY22) 47 days 65 days 12 days 81 days 65 days 46 days 40 days

This business reminds me of Jab We Met dialogue “saadi to band baj chuki h. Isse bura aur kuch ho hi nhi sakta. Ab sirf acha ho sakta h aur hoga.”

Given the current business condition, there is scope for further correction. But future plans are keeping hopes up. There is lower downside and higher upside. However, A lot depend on management walking the talk.

Disc.: not invested but keenly tracking

4 Likes

I feel one issue here is Mr Jayant Davar setting margin expectations prematurely higher.

One of the institutional analysts even spoke about the management “overpromising and underdelivering” on the margin part, during the Q1 con-call. The margin compression is temporary, but Dalal Street is more focused on the next quarter, so that’ll be a drag on the stock price.

Also, this is likely to be a short-term (1-2 years) play since revenues and profits will see a jump for the next year. The entire new capacity has been booked by customers, and that’ll flow to the top and bottom lines. However, beyond that, I’m unable to see many explicit and major catalysts that could drive revenues and profits upward at a good pace.

1 Like

Hearing about this capacity fully booked since q4fy22 concall but numbers are not matching the narratives.
Disclosure: Exited.

5 Likes

The new plants haven’t yet come online fully, so how would that reflect in the numbers?

Usually, auto ancillary companies have some minimum volume guarantee contracts in place, and only go ahead with new plants when customers ask for it and provide sufficient guarantee for the plant to be profitable.

Not sure what I’m missing here.

1 Like