Sealmatic India Limited

[rk1771]

Sealmatic India Limited

Sealmatic India Ltd manufactures mechanical seals, seal supply systems, pumps, valves, motors and high precision mechanical engineering spares and assemblies. The company designs and manufactures engineered mechanical seals and sealing support systems, used in rotating equipment, including pumps, compressors, mixers, steam turbines and other speciality equipment.

Product Profile:

a) Engineered Seals

b) Mechanical Seals

c) Standard Cartridge Seals

d) Supply System & Components

e) Gas-Lubricated Seals

f) Split Seals

g) Pusher Seals

h) Elastomer Bellows Seals

i) Metal Bellows Seals

The products are used in various industries like Oil & gas, refinery, petrochemical, chemical, pharmaceutical, fertiliser, power, mining, pulp & paper, aerospace, marine, etc. The Company is an Original Equipment supplier to KSB, Flowserve, Sundyne, KEPL, Andritz, KBL, RuhrPumpen, Wilo, SPX, Seepex, Düchting, ITT (USA), BHEL, Circor, Idex, Egger, PMSL, MSL, Xylem, Metso, Atlas Copco, Netzsch, Burckhardt, Idex, etc.

The Company has presence in 53+ countries including USA, Sweden, UK, Germany, Italy, Japan, Norway, Switzerland, Denmark, Netherlands, Australia, France, etc. As per 2023 AR, 62% of the revenue is generated from exports. The company’s margins are higher in the domestic market where it deals directly with end-users, while in exports, margins are lower due to dealing with distributors.

Sealmatic IPO came last year in Feb 2023 at a price of Rs. 225/-.

Financials:

Sealmatic has been a consistent performer, last five year financials on screener-

The growth has not been spectacular, but consistent. Operating margin has been hovering around 25%, though less than 20% in FY 2024. Cash flow of the company has been negative throughout.

The company has proposed maiden dividend of Rs. 1 [10%] in the current financial year. Presently the company’s market cap is 614 crores [CMP Rs. 678].

Fresh Investment:

The company has invested in new manufacturing facility which is likely to increase the capacity by 60%. It is continuously investing in research and development to evolve as a sealing technology leader, and Sealmatic India’s vision for the next five years is to become the fourth player in the global mechanical seals market, with a strong product portfolio and understanding of the business. The company has developed strategic partnerships in high growth areas within the UAE, Thailand, and the USA.

Operation &Maintenance Business:

The company is heavily investing in O&M business. The company explained in a concall,

“The reason being is that a huge amount of money is being invested into the O&Ms and project business. So that is going to remain until 2026. Once we start our O&M business which is more profitable as compared to any other business for us. So that ratio between inventory and sales realization will be much more better than what we see today. So that is the answer to question one and as regards to O&M business as I partly answered in the first aspect of this answer. O&M business will as I mentioned in many occasions that it will start from 1st April 2026 because the investment that we have made over the last year and the years that will ensue from today will make us realize more O&M business as we speak starting from 2026. And the profitability as we all know that on the O&M business is far far higher. It’s a business of you know proprietary. So once your mechanical seals go fitted as an original equipment you are there to enjoy the benefit of the annuity business which will remain the lifetime of the equipment which is 25 to 35 years depending on the type of equipment we are talking about. So that business is secured as I see today that we are investing into an O&M business which will result into a strong O&M business.

……

On a not very scientific but I can give you a ballpark arrangement to this kind of business. So when you typically invest into any project which is you know sometimes below your cost of raw material but when you are doing O&M business so you are going at the first fit as a OEM to the end user say for example a company like Reliance or a BPCL or HPCL so your revenue generation gross margins are hovering in the range of 85% to 90%. So that’s the kind of, margins we are talking about.”
Transcript of the concall is attached herewith-
Sealmatic-Concall.pdf (488.5 KB)

Certification:

The company has received various certifications like nuclear, marine work, DGQA, Ministry of Science & Tech, EU FDA, Russian TRCU, ASME U certification for pressure vessels etc.

Valuation:

In the last 4 years, the company topline and bottomline has grown at 20% CAGR. The company is presently valued at 62 times P/E, almost 7 times book value and almost 9 times FY 2024 sales. Thus, on various value parameters the company is excessively valued.

Reasons for Investment:

1. New capacity has come in line, which may give a jump to the topline and bottom line as expected by the management.

2. The area in which is company is operating is dominated by multinational players. Make in India theme will help the company in capturing bigger domestic market share with better profitability.

3. The promoters are well experienced in this line of business- The promoter Mr Umar Balwa was the founding promoter of Burgmann India Pvt Ltd which was a subsidiary of Feodor Burgmann Dichtungswerke GmbH & Co KG in the years 1993. Burgmann India Pvt Ltd was a joint venture between Feodor Burgmann Dichtungswerke GmbH & Co KG and the Balwa family with 51:49% equity participation. Mr Umar Balwa successfully led the company in India with a sizeable market share until 2007, when the parent company Feodor Burgmann Dichtungswerke GmbH & Co KG was taken over by the Freudenberg Group and under a friendly agreement the Balwa family sold their 49% shares in the company to the parent organisation.

4. O&M business, which is likely to start contributing from 2026 onwards meaningfully may become a game changer.

5. The business area of defense and nuclear is now well open to the company by achieving the certification of ISO 19443 which is nuclear and DGQA defense. Further, marine sector certification can open naval sector to the company.

6. The management is expecting 60% topline growth with 24-26% EBITDA in FY2025 as per concall talk. On this expected growth, in my view higher valuation is not exorbitant.

RISK:

1. The company is generating negative cash flow, which may affect its financials.

2. Though the market is lucrative, it is very competitive. KSB Ltd. entering into mechanical seals manufacturing for captive use plus aftermarket. SKF (SKF AB), John Crane (Smiths Group Plc.), and Flowserve Corporation are the leading market players. SKF holds the largest market share, as per the mechanical seals market report. Some of the other leading players include Trelleborg AB, EnPro Industries Inc. (Garlock Gmbh), Dover Corporation (Waukesha Bearings), SHV (ERIKS Group), Freudenberg SE, Tenneco Inc, Fenner Group Holdings Limited (Hallite Seals).

3. Future plans are mere estimates/guess; they may not materialise.

4. Investing in Microcap company may results in 100% capital loss.

Disclosure:

Invested and biased.

[sameernics]

Few observations:

1. The recent half yearly results looks not so great.
2. Apart from consistent negative cash flows, other ratios are also on higher side (Inventory days, payable days, working capital days).
3. YOY the operating margins have come down.

[rinkupranjan]

@rk1771
Thanks for the creating thread on SEALMATIC.
sharing few more things from my side:

BUSINESS MODEL:----
1, OEM ( Non Project Related)
2, OEM ( Project Related)
3, O&M ( Starts after commissioning of Project)
OEM ( Non Project Related):----Set of OEMs, which are not project related, which we call them as non-API business, which is profitable. So for example, we have business, let’s say example, KSB, Kirloskar and many more pump companies. So our business and our journey in mechanical Seals started in 2012. So predominantly, for the first eight years or nine years from 2012 until 2020, or rather '21, was purely exporting mechanical seals globally to more than 47 countries, and which was – and which is still continuing. It’s a profitable business.

OEM ( PROJECT RELATED):----- when we do projects and OEM business, a huge amount of resources in terms of money, time and manpower are required. And secondly, it also requires a lot of accreditation, certification, approvals, and all those things.so,we stayed away from the Indian market for the first eight years or nine years.
The only time that we lose money is on this large project, which are refineries, oil and gas, petrochemicals, power plants, etcetera. But once our seal fitted into an oil and gas refinery or any other core sector application typically gets replaced between 12 months to 18 months after commissioning of project. So because you want to enter into that business and then once that seal goes into the end user you have an annuity of 30 years. So your seal will give your business for the next 30 years and which will recover your cost more than 30 times over the cost of investment that you made. So once the project gets commissioned, which typically take 2.5 years to commission that pump because there are many other peripheral activities happening simultaneously at the project site.
we also do very scientific approach to taking orders and balancing them off. We don’t want to blow too much of cash away by taking too much of projects. So, we balance it out with end users, retailers, project and OEMs.As per Management, anything which is happening here in India, where we supply to OEMs, it is a project business. And that’s a business which drains our resources and drains our cash flows. So, that business would be approximately 20% of the turnover.

O&M ( Starts after commissioning of Project):—
All projects which are being commissioned at various stages from FY22-23 will be converted into O&M business would start from April 2026. So, that would contribute significant revenue on the top line and also increase the bottom line.
As per Management the gross margins of O&M would be in the range of 85% to 90% and that would be a Golden period for Sealmatic.
A project typically, let’s discuss a project of Rs.15 cr which is for Mongol Refinery. So we will execute this project by last quarter of this financial year. So by March or April 2025 we would be completing the execution of this project. It will get assembled at the pump OEM site and it will be transported to the refinery in Mongol. Say 3 years down the line when the plant gets commissioned, any product which has come as anOEM remains as an OEM. So with Mongol I will have say example 200 pumps which are fitted with the Sealmatic mechanical Seals and that itself is going to generate a revenue of rs. 16 crs every year for us.

EARNING GUIDANCE:----
we will double our turnover in 3 years’ time and from the FY2027 and half of the revenue will come from O&M business, that is our golden period, we will kick in where we will be able to encash on all the investments that we made in projects.Revenue potential from cuurent capacity will be INR 200 crs, if we do only O&M business.

RECESSION PROOF BUSINESS MODEL:–
As per management, Our product is recession proof. If you look at the 2 years of COVID that went by and if you look at our financial performance, we have increased our turnover and profit. So, these products are critical, they are required. And no matter what, if there’s a recession but they need to run a refinery or they need to run a power plant or they need to run a petrochemical plant and these products are required. So, I have never seen in my 35 years of experience any cycling, disturbance affecting our business. So, at the moment our major hunting ground would be refinery which would include oil and gas. Then I would say power, both nuclear and thermal, and petrochemical and chemical. So, I would say that surmises a majority of the market requirement and one of the most profitable business for any mechanical seal company globally. So, I would still like to focus in this area is because it is critical, actually it is highly profitable and certainly, it has got a long lifecycle. So, equipment in such an industry are having a life cycle of 30 years.

OPPORTUINITY IN GREEN HYDROGEN PROJECT:-----
Anything which is conveying media in any kind of form, maybe a liquid or a gas or any other medium, a mechanical seal comes into play, maybe a solar power plant, maybe a hydrogen cell unit. Or maybe hydropower. So, a seal is always deployed.

CMPETITION:—
Mechanical seals are critical installations and once it is installed in a project it is impossible to replace it during the lifetime of that project. It is important for you to just enter. Once you enter, then it’s 100% for you. There will be no competition for that particular project.
DISCLOSURE:-- INVESTED.

[Nimit]

Agreed on all the points about the business. Clearly a high quality business they are running and Mr Balwa is no doubt extremely qualified to run it.

Just want to highlight on growth guidance bit that Mr Balwa has missed the previous guidance and then even refused to admit that they gave a wrong guidance in the latest conference call. Compare jul 2023 concall with jun 2024. The earlier projections were of 30% growth and “golden period” with 60% growth to happen in FY25 and FY26 respectively. That has shifted by a year.

[rinkupranjan]

@Nimit

Just want to highlight on growth guidance bit that Mr Balwa has missed the previous guidance and then even refused to admit that they gave a wrong guidance in the latest conference call. Compare jul 2023 concall with jun 2024. The earlier projections were of 30% growth and “golden period” with 60% growth to happen in FY25 and FY26 respectively. That has shifted by a year.

It is true that Mr Balwa had given the guidance of 30 % growth in revenue for FY24 and 60% for FY 25 in earlier concall.
But in latest concall he denied that kind of guidance and told that he expect minimum 20% cagr growth in revenue for next three years.

[rk1771]

Great point Nimit.
But, stocks markets are all about “Triumph of the Optimists”, and in a bull market optimists do better than mere Triumph. Sticking to optimist managers can also be a good strategy.

[rinkupranjan]

@rinkupranjan

It is true that Mr Balwa had given the guidance of 30 % growth in revenue for FY24 and 60% for FY 25 in earlier concall.
But in latest concall he denied that kind of guidance and told that he expect minimum 20% cagr growth in revenue for next three years

We should not give too much weightage on earnings guidance from management.
Because PULAK PRASAD, Founder of Nalanda Capital shared his experience in this matter in his book 'WHAT I LEARNED ABOUT INVESTING FROM DARWIN ’ that

[Balaji1974]

Also Mr Balwa said that once the seal is sold they have assured business for the next 20/30 years. How true is that. Once the existing seal is gone will the user should necessarily buy form Sealmatic or they can buy any other seal from other business?

[Pickett]

Disc: Invested

All fine to be an optimist. However it is not ok to deny your own prior statements.

Rather, since the company is making an honest effort to keep it’s shareholders (particularly the small retail investor), address why your numbers went awry. It is a place of learning, not of denial.

If we find our management to be leading us astray, this is a very bad sign.

I have great faith in this company and it’s ip, it’s concept of the annuity style return of it’s products, the fact that the promoters have deep expertise in it, that they are willing to have regular concalls, answer questions from investors, that they discuss future plans, and have invested in capex. It is not with a little hope that we have invested with them, but denying previous statements begins to make one nervous.

I think it is an appropriate concern that has been brought up in the forum and we, as vulnerable investors, must be alert too. The very best minds were fooled by Enron et al.

@Nimit @rinkupranjan are right to observe this lapse on our behalf.

[karanthharsha999]

The DRHP stated 60% expansion on the existing capacity.
Possibility of misunderstanding, is high.
In all the concalls there was a confusion about this.