Shivalik Bimetal Controls Ltd (SBCL)

[SandyG]

I am really impressed with what have been written here in this thread and the “story” thread. This is really good business with lot of information available on product side plus the future requirements. My apology for asking very stupid question here.

When I go to IndiaMart site, I see the Shivalik shunt resistors are sold at Rs 15. I am just wondering such a niche technology then why the product cost is so cheap. And company is doing few thousand crores of business then just wondering how many such pieces they must be selling out.
I may be looking at wrong information on IndiaMart site but just looking for some more information

[GourabPaul]

Hi Sandy,

First thing that you need to understand about this business is that the shunts are produced as per the global TIER-1 requirements, you wont see these items in any B2B marketplace as there is IP around these designs and usually owned by the OEMs / Tier 1. Shivaliks shunts for BMS ranges between 1-2 EUR (for volumes above 3-5 million).

Shunt prices are also a function of material used, joining effort, degree of accuracy etc.

The shunts that you are referring to is probably used in computer equipments. They are not automotive shunts. You can go through this thread which summarize all these aspects.

Regards
Gourab

[ahmed]

It’s already announced

[r8b8]

My Q2FY24 Earnings call notes:
(can have some discrepencies due to audio quality issues)

• Overall outlook is positive compared to last quarter. Customer engagement has increased. Might see some constraints in next two quarters due to macro enconomic factors but next financial year should be good.

• During pandemic, over stocking happened because of supply chain constraints as what we produce is a critical component. Currently we are seeing inventory correction, which is a healthy sign. Other macro factors have minimal impact.

• Anticipating next FY, should be making at least 20 million smart meters YOY. Sizeable market share is achievable because of make in india push. Smart meters business is 10% of overall revenue. Expects this business to grow by 2X near year.

• Shunts revenue split: 40% automotive, 40% smart meters, 20% energy storage applicaitons. Within 40% smart meters: Don’t have exact number but roughly 15-20% is domestic.

• Drop in gross margins due to product mix changes, more of bimetals instead of shunts. Coming quarters will be similar. Next financial year, hopeful of things reversing. Earlier 50-50 split b/w shunts & bimetals. Will take few quarters to get back to where we were.

• Shunts revenue going down as orders drying up in short term because of macro economics, geo-political trends, inflation but confident of turnaround. Silver lining is order slowdown is because of degrowth in market. No single customer issue. Not losing out business to any other competitor.

• Current time has given us opportunity to work on process improvements, couldn’t do it before as we were running on higher capacity utilisation. Process improvements include focus on automation, detection systems, in-process inspections, expirement with technologies, detect potential faults / variations in production before end product is completed. Automation systems provide real-time data, provide batch-to-batch data, helps in analysing & determining how incoming variables impact overall quality of product. End of line online inspection. Aim is to reduce rejection, rework. cut down on manufacuting lead time. ~2% gross margin improvement target due to process improvements.

• Bimetals growing 20-25%. Capacity utilzation of bimetals: 33-34%.

• Most of the growth will come from exports.

• Other income consists of forex gain. 90% of it. 10% from small jobs we are doing for vendors.

• Expects 10-40% future growth. Huge variation in expected growth. There are certain factors beyong our control if they dont improve (which we are hopeful of improving) we will still grow by 10-12%.
  In case exports normalise, we will see growth beyond 30-35%.

• Continous projects & new product developments going on irresecptive of macro factors & slow down.

• Confident that we will maintain growth despite of slowdown in shunts division. Overall performance should be better than what we did last year. We increased capacity in bimetals division because we could forsee demand from exisitng customers & new opportutinities. Some are in development, some have materialised into business.

• Expects shunts division degrowth has bottomed out. Should remain at this level for some time and then pick up. Shunts division operating at 40% capacity utilisation.

[abhikjha]

I heard and read quite a few times on this forum that the Shivalik Bimetals has now been over-valued and it’s not a right time to invest. While on the technical side, this might not be the right time but in my view, fundamentals are still very strong and stock price is still undervalued.

To back it up, I performed Price Implied Expectations (PIE) suggested by Michael Mauboussin in his book called “Expectations Investing”. This method provides an overview about the future expectations which are built in the current price of the stock.

As MM (Michael Maubossin) refers to another MM (Modigliani and Miller) in his famous paper (What does PE multiple mean),

Value of Firm = Steady State value + Future State value.

Steady state value assumes that current level of NOPAT will be sustainable indefinitely and that incremental investments neither add or destroy value. It’s very much like terminal value calculation in DCF model.

Steady State Value = (NOPAT / Cost of Capital) + Cash - Debt

Based on March 2023 numbers, NOPAT is 78 Crs. I have assumed CoC of 12.8%. Cash is around 40.5 Crs and Debt is around 52.5 Crs.

Using above figs and using the formula above, Steady State Value will be 601 Cr.

Future State Value refers to how much company invests, the spread between ROIC and CoC and for how long the company can find investible value creating opportunities or the competitive advantage period which MM refers in his book.

Formula for Future State Value as given in his paper is as follows:

Future value creation =
Investment * (return on capital – cost of capital) * competitive advantage period / Cost of capital * (1 + cost of capital)

Here, the inputs are (based on March 23 figs):

1. Invested amount - 246 Crs.
2. ROIC = 29% (tax adjusted)
3. Competitive advantage period - 25+ (I calculated this based on the online tutorial at his website - Online Tutorial #8 — Expectations Investing

In his book, MM explains that the market always takes a long-term view and its expectations are already built into the current price. This is the period where company is expected to maintain its competitive advantage period before decline to a phase where reinvestment earns no more than CoC.

Using above formula and inputs, future state value comes to around 6945 Cr.

Total value = 601 Cr + 6945 Cr = 7546 Cr.

Value per share = 7546 Cr / No. of outstanding shares i.e. 5.76 Cr = 1310

If I apply 50% margin of safety, value per share comes to around 655 which is higher than current price of 545.

Caveats:

1. This is not a DCF calculation. I did that as well in much detail and that also indicates that current price is undervalued. I performed DCF based on both FCF and EVA.
2. With the help of this exercise, I just wanted to figure out what does current price imply and what kind of expectations are inbuilt into its current price.
3. A couple of quarters of shunted performance may not be an indicator of the long-term performance of the stock, at least in this case, market agrees with this view.

[Simrat]

If you take competitive advantage period as 25 years, every company is undervalued. No one can foresee competitive advantages lasting that long. Better to take 3-5 year view in most cases and weigh how much the current value is far off from some reasonable intrinsic value and then play on probabilities.

[abhikjha]

Thanks for the reply. I guess there is some confusion and that’s primarily because of its name . Let me clarify further. I am not taking competitive advantage period as an assumption in the above modelling works. This is a calculated field. First of all, there are many names of this period. MM calls it as competitive advantage period but more often refers it as market implied forecast period. His basic premise is that expectations investing starts with what we know, the stock price, and asks whether the expectations for the company’s financial performance implied by the stock price are justified.

Before we discuss it further, let me put here his response to an interview question by Motely Fool:

Q: The book also says, “Analysts typically choose a forecast period that is too short when they perform a discounted cash flow valuation.” Most forecast periods I’ve seen are five to 10 years before they calculate the terminal value. Can you explain how analysts should determine how long the forecast period should be?

A: This is interesting. Most DCF models use an explicit forecast horizon of five years. Some go out 10 years or more, but they tend to be rare. I think the five-year horizon is an outgrowth of the leveraged buyout models used in private equity. Five years may make sense for a private equity firm that has an explicit objective of exiting an investment in about five years. But just because we have five fingers on a hand, or because private equity firms hold investments for five years on average, does not have any relevance for properly modeling the economics of a public company.

The result is that investors have to allocate value in the continuing value estimate, often through using an unrealistic calculation of growth in perpetuity or multiples of earnings before taxes, depreciation, and amortization. The goal of a model is to represent reality, and this approach fails in that objective.

You determine the market-implied forecast period by using consensus estimates for free cash flow growth plus an appropriate continuing value, an estimate of the cost of capital, and seeing how many years are necessary to solve for today’s stock price. For example, in the case study we did on Domino’s Pizza we found that the market-implied forecast period was eight years.

Now if you read above answer by MM, it becomes clearer. In nutshell, this is not the period in which they will lose or maintain its competitive advantage, rather this is the number of years which the current stock price assumes that the company will have ROIC higher than WACC i.e. will have a period with competitive advantage. This is the period which an investor should project in future to do DCF calculations and beyond that period, terminal value calculations. Hope it’s clear.

Now, coming to your statement that if this period is 25 years or more, every company will be undervalued. Here is the proof why this isn’t the case.

Let’s take the example of Asian Paints. No one can argue that this company shouldn’t have competitive advantage for many years to come. However, the current stock price already has assumed this or rather it’s already factored in the price.

Below are the details of Asian Paints:

1. Steady state value = 36, 275 Crs
2. ROIC in 2023 = 31%
3. Future state value = 380, 619 Crs
4. Total value = 416, 894 Crs
5. Competitive advantage period or market implied forecast period = 25+ years
6. Value per share with margin of safety = 2173 which is lower than current price. That means its overvalued.

For more details, I would highly suggest you read his book, watch his YT videos and / or read his interviews. It will be super clear.

[kalidasa]

The thing that you are calling “competitive advantage period” is referred to as “market-implied forecast period” at the linked website. Unfortunately, the website does not seem to have described the meaning of this phrase in detail like it has described other phrases like “Net Working Capital” by breaking the phrases into “component parts”.

Now, an investor’s view may agree or disagree with what is “market implied”. The investor may believe that the market is overvaluing the competitive strength of the company, or is undervaluing.

Market implied forecast period cannot be used as a parameter to compute the target price. Doing so will overestimate the target price for already overpriced stocks.

Disclosure: I have tracking position in SBCL.

[abhikjha]

Thanks for your comments. I don’t want to drag this further. However, I will recommend these books and readings -

1. Expectations Investing (book)
2. What does a PE multiple mean (a paper by Credit Suisse). Search for it on Google.
3. Valuation book by McKinsey (one of the highest regarded books on valuation).

I am giving a screenshot (excerpt) of this book for your reference (please read the definition of N in the screenshot):

Now if we want, we can argue with Modigliani and Miller who actually won the Nobel Prize why they called that period as competitive advantage period.

[abhikjha]

Few more screenshots (one from Expectations Investing Book and another from the Credit Suisse paper)

[kalidasa]

I stand by what I wrote. Where is an example that they have used market-implied forecast period to compute the target price? ChatGPT can read these books also, but finding what makes sense and what does not make sense requires some amount of independent thinking.

[Thiyagu]

Shivalik Bimetal Controls Ltd. signs MoU with Metalor Technologies International SA for setting up a Joint venture to produce Electrical Contacts
https://www.bseindia.com/xml-data/corpfiling/AttachLive/1cdd2111-6c3a-4274-b8b5-b49a3828d802.pdf

[SUNRAY]

https://www.axios.com/2023/11/28/car-dealers-electric-evs-biden

What they’re saying: Customers cite a variety of reasons for avoiding EVs, Anderson and other dealers told Axios.

• They’re too expensive, buyers have no place to charge at home, and public charging is too time-consuming, for example.

• Dealers say some customers have even traded in their EVs, complaining their driving range was affected by towing a trailer or extreme temperatures.

• Tires on an EV wear out much faster, too, customers complain.

"It’s a hard sell on an EV right now in our market," said Mary Rice, who owns a Toyota dealership in Greensboro, North Carolina.

[ranvir]

Shivalik Bimetals Q2 concall highlights -

Sales - 128 vs 118 cr
EBITDA - 29 vs 27 cr ( margins @ 23 vs 23 pc )
PAT - 20 vs 19 cr

Manufacturing facilities -

Plant 1 @ Solan - for Electron Beam Welded ( a hi-tech process ) Shunt Resistors, peak revenue capacity - 700 cr

Plant 2 @ Solan - for thermostatic bimetal strips ( uses complex diffusion bonding techniques ), peak revenue capacity - 600 cr

Plant 3 @ Solan - for electrical contacts ( uses complex and specialised bonding processes ), peak revenue capacity - 300 cr

Total revenue potential of Rs 1600 cr vs current topline run rate of about 500 cr. Aim to hit these potential figures inside next 5 yrs

Capex lined up - 20 to 30 cr (only) - for improving productivity and cost optimisations from FY25-26

Product applications -

Shunt Resistors - regulate the flow of current in an electrical circuit. Used to measure, sense the flow of current and create a path of least resistance for the electrical current to pass. Used in - smart meters, EVs, Energy storage, power modules

Thermostatic Bimetals - critical components used in overload protection devices. Used in - switchgear, electrical appliances, medical devices, automobiles

Electrical Contacts - these are connecting points when a switch is turned on/off. Made of different types of precious metal alloys. Used in smart meters, switchgears, wires and accessories, electrical appliances

Sales break up -

Geography wise -
Export - 65 pc
Domestic - 35 pc

Product wise -

Shunts - 43 pc ( started just 5 yrs ago )
Bimetals ( including contacts )- 57 pc

Industry wise growth rate projections from 2023 to 30 -

Shunt resistors - 14 pc CAGR !!!
Bimetals - 7 pc CAGR
Electrical contacts - 7 pc CAGR

Formed a JV with International leader - Metalor technologies ( Swiss Company - Japanese parentage ) to make Electrical contacts ( announced on 30 Nov 23 ) - should lead to significant volumes uptick in the Silver contacts segment

FY 24’s slowdown should be a temporary phenomenon due current trend of de-stocking ( a lot of over stocking happened during the COVID times ). Long term growth guidance remains intact. Should see a descent pick up wef Q1 FY 25

Global slowdown ( due De-stocking ) being countered nicely by increased domestic demand, demand from Asia, Australia

India should be producing around 2 cr smart meters per year. Most of the component supply for these smart meters should get procured from Indian vendors under the make in India project

Breakdown of sales of Shunt Resistors -
40 pc from - smart meters ( out of this 15 pc is domestic demand )
40 pc - EVs
20 pc - energy storage systems

Share of fixed costs @ 11-13 pc. As revenues grow, operating leverage should kick in

Seeing some pickup in demand for Shunt resistors for smart meters. Hope to double sales of shunt resistors from the smart meters segment in FY 25

Should get back to 50:50 sales breakdown wrt Shunts : Bimetals sometime next yr. Shunts is a higher margin By and large, exports shall be the major driver of growth for the company over the medium to long term. This also is a key risk - IMO

If exports don’t pick up as expected, management still sees a growth of 12-15 pc in next FY. If exports pick up - as expected, growth in next FY can be as high as 40 pc

5G roll out should help the company as their products go into critical energy storage applications

Disc: holding, biased, not SEBI registered

[spatel]

Dalal & Broacha has initiated coverage on Shivalik Bi-metal Controls (here).

• Shivalik emerges as a standout 3-way proxy play for EV, smart meters, and energy management systems (EMS) amid the overarching themes of decarbonisation, digitalisation, and electrification.

• Global bi-metals market is projected to surge from Rs 1,600 cr to Rs 2,800 cr till FY30. Currently Shivalik commands a robust 16% global market share and aims to elevate it to 22% in the near future.

• Global shunts market is expected to grow from Rs 1,840 cr to Rs 5,200 cr by 2030. Currently Shivalik enjoys a 12-13% market share and aims to increase it to 17-18% in the coming years.

• The Management remains confident that there will be a 2-3% margin expansion on account of increasing volumes & better operating leverage reaching 26-29% EBITDA margin levels going forward.

• With minimal further capex of Rs 20-25 cr – Shivalik is confident to be able to almost quadruple its FY23 topline of Rs 470 Cr to 1600 cr with its existing setup & technology.

Rare to come across a company with the following combo : decent current addressable market size + market growing at good factor + market share gain scope + margin expansion guidance + (sunrise sector). Most importantly it is a business that is expected to grow with virtually no major capital requirements.

Here is what Mr. Buffett wrote in the annual report for 1994 and 2007 (thanks to Prof for reminding in his case study on MSTC here - fantastic read it is).

There’s a huge difference between the business that grows and requires lots of capital to do so and the business that grows and doesn’t require capital. And generally, financial analysts don’t apply adequate weight to the difference between those. In fact, it’s amazing how little attention is paid to that. Believe me, if you’re investing, you should pay a lot of attention to that.

It’s far better to have an ever-increasing stream of earnings with virtually no major capital requirements. Ask Microsoft or Google.

Disc: Same as before (invested)

[vivek_17]

The report is so well timed. Yesterday HPL electric has been awarded a smart meter order of 545 Cr and today Genus Power was awarded a smart meter order worth 1026 Cr. Genus Power Infra Wins Rs 1,026-Crore Smart Meter Deal, Order Book Tops Key Milestone
https://www.financialexpress.com/business/industry-hpl-electric-bags-smart-meter-order-worth-rs-545-crore-from-various-customers-3338310/
Technicals suggest that the stock is at support levels and was only awaiting fresh triggers.

Disclaimer - Biased and invested.

[SUNRAY]

Disc: Invested

Why would the ROE and RoCE dip if we are looking at greater revenue and profits for FY25/FY26?

[praveen_potnuru]

ROCE = EBIT/ Capital
Capital = shareholders equity + debt
Shareholders equity = reserves + surplus

Whatever profit the company makes, it goes into Reserves…

So, the denominator of ROCE increases > lower ROCE

the Co can give dividend or buyback to reduce capital and improve ROE and ROCE.

Hope it’s clear
Praveen

[bipul]

if profit becomes double then the denominator will be less than double hence ROE and ROCE will be higher
Am I missing something ?

[Jitendrapd94]

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