Shivalik Bimetal Controls Stock Story

sahil_vi · November 5, 2022, 5:30am

ELEVATOR PITCH

One of the Longest Value Chain among Peers: SBCL is known for the fastest response times on custom projects for Clients owing to it’s superior control/process automation grip on Shunts value chain (unique to SBCL, and unlike other shunts majors) - from RM inventory, Bimetals alloy expertise, to custom design to moulds/tooling, custom in-process inspection/QA automation to fully automated EBW manufacturing process – fine-tuned for specific customer projects. 75% of SBCL business is custom designed, giving customers much-needed flexibility/control.
Durable Dominance in a Market with Tailwinds: SBCL’s ultra low-ohmic shunts and bimetals business is a simple linear business (not many variables, and most variables under control) with limited competition. With it’s demonstrated ability to deliver on first-of-its-kind customer requirements ahead of more established peers and at lower cost (recent SMD Shunts EU 5G rollout requirements, e.g.) SBCL is uniquely positioned, today. Quite a few of SBCL products have thus become the Reference industry standard. Reference standard implies the customer asks new vendors wanting to participate to first match SBCL product specifications.
Formidable Global Leadership Challenger: IsabellenHuette has been for many years now the undisputed leader in automotive shunts industry with ~50% market share, Rohm, Panasonic, (?) being other leading players. As per Industry scuttlebutt SBCL enjoys global cost leadership, and in just 5 years is catching up fast with a 10-15% market share already. SBCL Management indicates they have the largest shunts capacity today with its factories running 3 shifts 24x7 operations, and another 60% expansion underway (based on 3-4 year customer forecasts) to address next 2-3 year requirements. SBCL is also delivering at 4-20 weeks max lead-times (half that of some shunts majors). With EV shunts market at an inflection point (and 8-16x requirements per EV than conventional ICE), SBCL finds itself in a sweet spot and could prove a formidable challenger as it scales up strongly in next few years.
Customer-Driven Innovation Curve: Given SBCL’s superior metallurgy skills, ability to completely custom-design-build fully automated EBW in-process inspection/machinery, and cost leadership SBCL is often pushed by MNC customer majors to innovate and deliver complex components for their specific product roadmaps. This has led to deeper penetration and major scale up in SBCL customer relationships, as can be noticed (from recent export data) with a European switchgear major.
Rare high EPA/Sales Small Business: SBCL has been growing Sales over last 5 years at ~20% CAGR with EBIT and PAT north of 30% CAGR. 5 Year Rolling Incremental ROIIC today stands at ~65%. EBIT/Invested Capital has reached north of 30%. Consequently Economic Profit Added (EPA) has been accelerating (over last 3 years from 3% to 8%) to 12% of Sales today which is special to see in any emerging small business. Highly profitable mature businesses exhibit double digit EPA/Sales. If SBCL continues to execute well in the next 3-5 years and harnesses the opportunities before it, there is great headroom to continue to invest higher capital at high rates of return for many more years.

CURRENT MARKET/INDUSTRY TRENDS

SBCL current sense shunts primarily address the Internal Combustion Engine (ICE) Battery Management System (BMS) requirements today, and account for ~10% of low-ohmic shunts global market share, currently. The EV market in India is likely to increase at a CAGR of 36% until 2026 as per this IESA report. Additionally, the EV battery market is forecasted to grow at a 30% CAGR during the same period. As per SBCL Management, EV applications typically require 8x-16x current sense shunts, as compared to ICE BMS requirements.
Another large opportunity for SBCL shunts is the move from legacy electric meters to smart meters. The global smart electric meter market size is projected to reach USD 36.00 billion by 2028, exhibiting a CAGR of 8.1% during the forecast period. Domestically, Smart Meter National Programme (SMNP) aims to replace 25Cr conventional meters with smart meters in India. As per this National Smart Grid Mission update though, only 5Mn (of the sanctioned 11.3Mn) Smart Meters have been deployed in India under various schemes/states, as of 30th September 2022.
SBCL Next-generation thermostatic bimetal/trimetal strips serve Switchgear markets primarily, and account for ~16% global bimetals market share, currently. The Global switchgear market is expected to grow at a CAGR of 5.7%, from an estimated USD 90.9 billion in 2022 to USD 120.1 billion by 2027 (Switchgear Market report). As per Management, SBCL is currently gaining share from incumbents and likely to reach ~22% Bimetals/Trimetals global market share in in the medium term.
India Switchgear Market is projected to grow at a higher rates. CAGR of 7.17% during 2021-27F (6wresearch report); CAGR of 15% (TechSci Report). Electrification programs running across the country and the development of transmission and distribution networks are fuelling Indian switchgear growth. Further the infrastructure development schemes initiated by the Indian government, like Smart Cities, Make in India, Deen Dayal Upadhyaya Gram Jyoti Yojana, Green energy corridor, among others, are contributing significantly to the growth of the switchgear market in India.

BARRIERS TO ENTRY

Unbeatable Technology/Capex Investment (?): SBCL has a large number of Electron-Beam Welding (EBW) machines today. Each machine would cost ~Rs 20 Cr plus, at today’s prices. Over the last many years SBCL has greatly enhanced it’s in-house expertise for custom design & development of EBW machines, and automated custom in-process inspection/testing procedures, fine-tuned to customer needs (in partnership with EBW equipment manufacturers and 3rd party developers).
Superior Metallurgy/EBW Knowledge: The effectiveness of electron beam welding depends on many factors. The most important are the physical properties of the materials to be welded, especially the ease with which they can be melted or vapourised under low-pressure conditions. Probably the biggest barrier to entry is thus through SBCL’s in-house metallurgy (bi-metal/tri-metal) knowledge base honed over last 30+years coupled with EBW (Electron-beam welding) equipment/process know-how. SBCL Management has indicated the JV since 2008 with Aperam (parent Arcelor Mittal vintage) has had a significant role.
Niche Market: SBCL operates in what is still, a niche global market (~2500 Cr). That Clients like Vishay, Riedon Inc, Robertshaw Electronic Controls despite their strong $Bn balance sheets are unwilling and/or unable to get into manufacturing shunts (at scale) works well for SBCL.
Long Gestation period: Specially on auto side of business, it takes 3-5 years to break into new business with an auto OEM, even with the right certifications. SBCL has been working with many such clients over last many years.
Client Stickiness is huge with OEMs resistant to change what already works well for the supply chain, and is a very small fraction of their product costing. Besides the fact that globally very few players are able to meet the quality deliverables.

BUSINESS MODEL

75% of Products sold by SBCL are custom-designed for its customers. Major customers also invest in the Tooling/Moulds designed/used specifically for the custom products. For bulk of the customers Repeat Business/Customer Lock-In is thus baked-in, in SBCL Business Model (till the time Customer continues to sell that product).
For Shunts bulk of the Sales were to Tier 2 Suppliers like Vishay, TTE, and others who supplied to BMS Vendors/OEMs. Again bulk of the Sales were for ICE BMS only, EV BMS Sales (even Vishay’s) is not significant today. This is set to change with direct EV SMD (surface mounted device) Shunts Sales to prominent Tier 1 Suppliers to global EV OEMs (relationships in place, today) set to go commercial and attaining scale in coming 2-3 years. Also locally to major EV players like Tatas, Mahindras [Refer [Fig 1].
Raw Material volatility is mostly pass-through. Contracts are entered into based on last months average pricing and/or last quarters average pricing. Management is confident on its ability to maintain margins at similar levels.
Right to win based on global Cost Leadership, Metallurgy Skills, Fastest Response Time, Lowest Lead Times. Largest Shunts Capacity in the world working 3 shifts 24/7 (expanding by 60% again for next 2 years). Fastest response times for custom projects owing to complete control on value chain - from custom design, moulds/tooling, and in-process Q&A automation, fully automated manufacturing process.
Future Expansion plans based on 3-4 year Forecasts/Orders Visibility from Customers. Major customers committing large multi-year volumes to secure Supplies.
Future Growth in Bi-metals likely from gaining market share from large incumbents. Management indicated current 16% market share can likely go up to 22% in coming years. Shunts growth will be driven by huge expansion of end market. 10% of global auto sales are already EV.
Joint-Design/Customer Handholding is becoming the norm for many EV customers who are new to Shunts. Many such customers are using Shivalik’s advanced moulds/tooling and design facilities, automated in-process testing facilities, and best-in-class manufacturing facilities from Solan facilities.
Given the fast growth, SBCL has to hold large inventory positions (Mar-22 inventory is ~35% of FY22 sales). This is needed to ensure that the reliability SBCL is known for is sustainably delivered. This has impacted its operating cashflows (Negative operating cashflows for FY22). Primarily (~60% of) this is raw material inventory. Part of this can normalize in an operating environment if and when global supply chains go back to pre-covid normal (~25% inventory position pre-covid). Raw materials inventory of around 120 days is maintained as procurement is imported and includes a variety of alloys. Receivables and payables are along expected lines (~66 days and ~46 days respectively in Mar-22).

INTERESTING VIEWPOINTS

Global Cost Leadership.
16% stake in 2008 JV with Aperam Imphy, the alloys division of Aperam S.A (spun-off from Arcelor Mittal in 2011, $5bn annual sales) called Innovative Clad Solutions. JV makes Clad solutions - applications in industries like cookware, energy storage, bearings beyond electronics. (160Cr Topline with 5x growth in PAT in FY22). The metallurgy strengths (parent) has helped Shivalik up the ante in Bi-metal/Tri-metal technology curve
Fastest Response time among peers with Shivalik controlling the longest value chain in bi-metals and shunts. Superior metallurgy knowledge, ability to completely custom-design-build fully automated in-process inspection/machinery (with global partners) - unique among peers. Turnaround time for some unique customer-specific projects have sometimes been less than half that of major incumbents.
Quite a few of SBCL products have thus become the Reference industry standard. Reference standard implies the customer asks new vendors wanting to participate to first match SBCL product specifications.
Indian domestic EV Shunts market (yet to really take off) is likely to be completely dominated by SBCL. EV leaders like Tatas and Mahindras have been working for long with SBCL on the products. As per industry scuttlebutt, some of the leading players are actually working from SBCL Solan factory, to jointly design/automate/test custom products. EV Shunts use will be 8x-16x standard ICE BMS use.
Europe 5G - One-time requirement of Surface Mounted Device (SMD) Shunts during installation/rollout phase. Shivalik delivered quick solution, likely to be the de-facto choice. Interesting to see if Indian 5G Network rollout/installation phase (getting rolled out as we speak) sees a big spurt in requirement of SMD shunts.
SBCL has set up a fully automated Rolling Mill and fully automated Bonding Mill with the ability to roll bimetal strips down to as thin as 0.09 mm with a precision of +/- 1 micron. Rolling Mill is a machine that reduces the thickness of metal without sacrificing any of the material, material is displaced, never lost, no scrappage. Bonding Mill fuses a central strip of pure metal to outer strips of alloy-metals.
As per industry scuttlebutt supply lead times currently for some Shunts majors are more than 50 weeks, while Shivalik’s lead time time for any customer product supply has never exceeded 20 weeks
SBCL increased stake in subsidiaries: SBEPL: valuation 3.15cr, sales multiple- 2.5x , net assets multiple 1.37x, net profit multiple 14x, SBECPL, valuation 23.56cr sales multiple .59x , net assets multiple 1.75x , net profit multiple 9.77. These have been value accretive EPS accretive valuations which are helping consolidated revenues grow much faster than standalone due to the low base effect.
Can forward integrate to Current Sensing modules from bare Shunt Resistors (~5x value adddition). As per Management, these products are on their radar. Huge potential for current sensing modules in charging applications infra, heat/temperature control applications for BMS add-ons,and so on.
In recent UP & Gujarat government smart meter tenders, only 3 companies’ shunts qualified -Isabellenhuette, SBCL, Redbourn engineering. Redbourne is now bankrupt, further consolidating supply side.
SBCL used to make CRT (Cathode Ray Tube) monitors till 2014. in 2011, CRT revenue contribution was 30% but fell to 0.5% by 2014, and the project was shelved. SBCL wasn’t able foresee the technological obsolescence of CRT in favour of LCD/LED TVs. To their credit they were able to adapt the business model towards scaling up Bimetals and Current Sensor Shunts over time.

BULLISH VIEWPOINTS

Largest capacity for Shunts globally (already). Another 60% expansion in next 2 years. Expansions are based on 3-4 year forecasts from Customers.
Global Market share 10% plus in Shunts, and 16% of Bimetals. End markets like EV are growing at 30%-40% even at global level (Domestic market is faster growing but smaller base and relatively lesser appreciation for high quality). Given oligopolistic product dominance market, good scope for market share expansion and overall market growth. Shunts/EV Shunts market is just getting off the blocks (scope is explosive but unquantified, as yet). Bimetals is a more matured market, but Shivalik has been increasing market share, especially from FY22 onwards
Raw material prices are a pass through for Shivalik which we can see in terms of how stable gross margins have been in last many years.
High Fixed Asset turns, reasonable working capital intensity, high operating margins mean that Shivalik is able to churn out 30%+ ROCE. Low competitive intensity helps with latter. Low capital intensity helps with former.
High technological & technical knowhow based, volume based, cost based, learning curve based entry barriers, first mover advantage, client (Auto OEM) stickiness, high customization requirement both on revenue and capital equipment side ensure that industry structure is in favour of incumbents like SBCL
Government of India plans to convert all installed conventional electric meters to Smart Meters. Total installed base of Smart Meters in India will thus go up from 50 Lakhs (can track status here) to 25 Cr. Each Smart Meter typically uses 2 shunts (source). Demand for Smart Meter shunts is thus expected to go up 50x cumulatively from current levels. SBCL being a leading shunt supplier for Smart Meters is expected to be a major beneficiary.
Various Switchgear MNC majors like Siemens, Schneider doing capex in india to meet both domestic demand & to export using india as a low cost base will aid further in increasing SBCL Bimetal sales.
Shunts are a critical application low cost product. A small part of end product cost (1 shunt costs ~1$. Even with 10 shunts, cost as a % of a 10000$ Car is < 0.1% of end product). This makes shunts an unlikely component on which OEMs would try to squeeze the supply chain for margins.
Mr. Kabir Ghumman & Mr. Sumer Ghumman sons of Shri N.S. Ghumman (Managing Director) have been working at SBCL for 14 years. Mr Kabir is a mechanical engineer and responsible for the supervision of all technical and process engineering aspects of the Company at the manufacturing unit. Mr Sumer is a qualified Graduate in Accounting & Finance having experience in Corporate Strategy, Governance, Finance, Regulatory/Legal and Risk management. He is also serving as Managing Director of the SEPPL. Thus, Succession Planning is reasonably clear in SBCL.

BEARISH VIEWPOINTS

Case of Peak Margins (?): Post covid demand surge has resulted in shortage for electronic components. This has led to expansion of margins for key clients like Vishay. Could this be a case of peak margins for SBCL? If margins come down for Vishay (or in general across supply chain) it could impact SBCL negatively.
One-off Revenues share: Although SBCL has helped some customers execute 5G launches in Europe by improving design/cost competitiveness this means that part of current & near term revenue might be one-time demand and non-recurring business.
R&D Team Expansion behind the curve (?): The R&D activities are led by the MD Mr Ghumman. He is 70+ years of age. There is a risk to the R&D pipeline of the company given that previous breakthroughs like Bimetals & Shunts have been led by Mr Ghumman. SBCL Management has indicated R&D Team expansion is a key focus area for the near/medium term
Client concentration risk is high. Though headed in right direction as dependence on Vishay has come down from 50% of sales to 30% of sales.
Volatility in raw material prices and forex rates: With metals such as nickel and copper forming around 50% of overall cost, operating margin remains susceptible to volatility in commodity prices. As per SBCL Management, though metal prices may continue to fluctuate, this risk is mitigated by order-backed processing undertaken by SBCL on highly customised products.
Rapid Expansion Spree: Anticipating high demand for its products SBCL has been on a rapid expansion spree. Management though has indicated that all expansions are being undertaken on the basis of customer-driven 3-4 year forecasts. However, It is possible that major competitors have embarked/might ramp up capacities in similar fashion in order to defend/gain market share. This could lead to stretched working capital cycles and/or margin deterioration In the medium term.
Supply Disruptions: Nickel and copper supply disruptions due to geo-political effects of continuing Ukraine conflict and/or US:China semiconductor/rare earth metal conflicts cascading effects.
Increasing Competitive Intensity: Although it may seem like SBCL is in a sweet spot for the near to medium term, the profitability and huge growth prospects of its product markets is bound to attract enhanced competitive activity - a key monitorable. Even local competitors like Permanent magnets have been trying to crack the high value shunt market for some years now.
Technology Substitution: Shunts are an alternate current sensing technology to Hall effect sensors (HES). HES are also used by some clients but is currently more expensive (than shunts) and reportedly less suitable for high temperature applications. Advancement on HES in terms of costing/applications could result in them becoming more competitive than shunts
Single Point of Failure Risk: All of SBCL’s factories are in Solan. Himachal is a high seismic activity zone. The tail risk of seismic activities disrupting production cannot be ruled out.
Largest client has reducing book-to-bill ratio: Vishay’s book-to-bill ratio has been decreasing (see line item for passive components).

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This indicates some softening of demand. This could result in reduction of margins, or growth, or both.(Book-to-bill for passive components/Resistors segment is holding up better than other segments of Vishay)
Customer Losses in recent past: SBCL Export Data points to 3 longstanding customer accounts going off Shivalik Books since 2020. One in Bimetals segment and a couple from EBW Shunts segment. Though compared to major new accounts signed up this is probably negligible, will be good to check with SBCL Management reasons/significance.

VALUATION MODEL
At CMP 472, SBCL trades at around 2700 Cr Market Cap - 40x H1FY23 annualized consolidated (ex other income) earnings boosted by exemplary performance, of late. Near Term growth has been good - 59% in FY22 including 47% volume growth - well supported by Industry Tailwinds and SBCL Competitive Position growing stronger, as enumerated in the Stock Story.

Management guidance (FY22 AGM) has been conservative, as always, and one can model in 20% top line growth and margin maintenance with 25-30% ROCE for the medium term (~150 days WC, Fixed Asset turnover of ~4x, EBIT margins of ~17-22%), given SBCL past track record and competitive positioning.

Medium-Term Optionalities:

EV Shunts Market huge expansion and/or significant EV customer penetration by SBCL
Margin expansion through forward integration into current sensing modules

CORPORATE GOVERNANCE SCAN

The company reported two adverse compliance related issues in FY22. First was related to delayed secretarial report filing with stock exchange, and the other related to insider trading violation

RED FLAGS/FORENSIC SCAN

Negative Operative Cash Flow in FY22:
With a lot of money stuck in Receivables (16 Cr) and inventories (45 Cr), operating cash flow has been negative.

Interest Accrued and Due:
FY22 AR indicates interest accrued and due of Rs 9.41 lakh as on 31st March 2022. Typically, such entry would mean company is not able to honour its obligation on time. However, during AGM, Management clarified that it was due to new accounting standards which resulted in booking interest, while bank charged interest only on 1st April. The explanation appears acceptable but such entries, at best, shall be avoided in financials.

Interest on delayed income tax payment:
The company paid Rs 24.33 lakhs during FY22 and Rs 21.84 lakhs during FY21 as delayed in income tax payment. Management clarified that the company did not envisage growth in profit would mainly came in Q4 of year resulting in higher than expected tax liability and hence company had to pay interest on delayed income tax. However, this does indicate scope for improving internal systems so that company is on-time in paying tax liability, and avoid such delays.

Accounting related issues:
Large CWIP ageing more than 3 years:

Conservative accounting policy would suggest writing off such amounts to P&L, unless there is logical base to assume that such expenditure can be capitalised and useful for future projects of the company.

Non-core assets not being liquidated

Management could prioritise disposing off freehold land and gold bond investment and utilise that fund in business capex. While the amounts are not very material, but still, if the future of such investment are not core to business, it is better to liquidate, at the earliest.

DISCLOSURE(s) OF STOCK STORY CONTRIBUTORS
Sahil Sharma: Invested, ~15% of portfolio
Dhiraj Dave: Invested ~17% of portfolio
Donald Francis: Invested

BACKGROUND
Shivalik Bimetal Controls Ltd. is a company specialized in the joining of material through various methods such as Diffusion Bonding / Cladding, Electron Beam Welding, Solder Reflow and Resistance Welding. Our present program includes Thermostatic Bimetal, Clad Metal, Spring Rolled stainless Steels, Electron Beam Welded Material with multi- Gauge and Multi- Materials strips and Thermostatic Edge- Welded Strips for a board spectrum of industries. [1]

MAIN MARKETS/CUSTOMERS
The company products are exported to around 40 countries around the world. [1] India accounts for 40% of company’s revenues, followed by America (35%), Europe (14%) and rest of world accounts for 11% of revenues. [3]

MAIN PRODUCTS/SEGMENTS
The company is in the business of manufacturing & sales of Thermostatic Bimetal /Trimetal strips, Components, Spring Rolled Stainless Steels, EB welded products with multigauge, Cold Bonded Bimetal Strips and Parts etc. [1]. Thermostatic Bimetal/Trimetal Strips contributed ~46% of revenues and Shunt Resistors contributed to ~52% of company’s revenues in FY22.

The shunt resistors division of the company is relatively new and was started 4-5 years back by the company. [2] and caters primarily to Internal Combustion Engine (ICE) Battery Management Systems (BMS).

Electric Vehicle (EV) Automotive Applications

Target applications market (figure above) for Shivalik’s products in the EV domain (yet to take-off) is now hugely enhanced with SBCL working directly with some EV OEMs and Tier1 Suppliers to EV OEMs. From Air Conditioning Systems, HVAC systems, lighting systems, door control modules to AC/DC converter and energy measurement sensors in EV chargers, in addition to EV BMS.

MANUFACTURING FACILITY
The company has an established facility in Solan, Himachal Pradesh from where it carries its manufacturing business. It has its head office situated in Delhi. [4]

JOINT VENTURES AND ASSOCIATES
Shivalik Bimetal Engineers Pvt Ltd - It is wholly owned subsidiary of the company. It owns capabilities for designing of press tools (CAD) & their manufacturing. [6]

Checon Shivalik Contact Solutions Pvt Ltd - This is also a wholly owned subsidiary of Shivalik Bimetal. It makes silver & silver alloy based electrical contact materials and assemblies. [6]

Innovative Clad Solutions Pvt Ltd - The company is a JV between Aperam & Shivalik wherein company is a minority shareholder with 16.01% stake. [2] [6]

SOURCES:

AGM - Sep 27, 2022
Industry Scuttlebutt with some Tier2 Suppliers
Investor presentations
Annual Reports

sahil_vi · March 21, 2023, 6:44pm

Company has come out with perhaps its most detailed investor presentation & communication.

This is for some physical meetings co will do in mumbai in next few days.

Some key takeaways from the presentation:

Company has clearly outlined its competitive advantages - Capabilities across design, development, testing, validation, manufacturing and delivery. Focus on R&D for improvement in product performance, cost, reliability & quality. Some of the competitive advantages like “In-house Tool Design & Manufacturing” which we had called out in the stock story are also featured in the presentation

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TAM for shivalik products is outlined. ~2000cr for Shunts, ~1600cr for bimetals, ~6000cr for electrical contacts (i dont think we have focused on this much). Shunts market could expand ~3x in next 8 years led by demand for EVs & Energy storage solutions

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Shivalik’s precision engineering experience has allowed them to develop shunt resistors
that are qualitatively better than those of its competitors. Lack of any domestic competition is called out. Technical knowhow in metal joining is called out as the moat of the company.

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Client relationship is called out as a key source of competitive advantage. Shivalik co-designs these shunts custom for its clients & the full process of conceptualizing, designing, prototyping, piloting & sampling & mass production can take 3-5 years. Shivalik also calls out that it is preferred supplier for many cos like Siemens, Legrand, Schneider.

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Perhaps the biggest incremental information addition has been the quantification of just how much revenue the new plants can add to shivalik. The total revenue potential of all 3 plants (including 1 old plant & 2 new plants) is called out to be 1600 cr rupees. Looks like large part of capex is done for Plant 1&2. Perhaps some capex for plant 3 might be required. Only capex requirement called out in slide is 20-30 cr for debottlenecking in next 3 years

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Another interesting callout is that the remuneration committee doesnt have any sandhus or ghummans on it, only independent directors

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One thing that i personally found interesting is that only 11% of revenue comes from eletrical contacts but it is the largest market by far. 3x larger than bimetals & shunts. Why then has shivalik not chosen to go after it aggressively (even in expanded revenue potential this is hardly 300 cr, (19% of eventual projected revenue) Needs a bit more digging into. Perhaps lower margin product? More commoditized? higher competition? (Only 11% of revenue currently)

Disclaimer: Same as before.

If anyone is planning to attend the in person conference please reach out to me, we could discuss the questions which we can ask the management in order to make best use of the opportunity.

Donald · September 23, 2023, 5:07pm

To my mind, this (not so complex ) picture has it all !!
Please take your time perusing this, all the clues are in.

This is why/how we think SBCL is getting to a stronger trajectory. IF Industry Tailwinds last (no inventory glut situation in near to medium term like we saw in 2018), then SBCL Competitive Position will indeed become much stronger. It will be very difficult to dislodge this business from its perch.

If we can NAIL this down - get the answers from Shivalik Mgmt (fill in the gaps, get confirmations) AND get it corroborated from domain experts in the automotive EV BMS Supply Chain, our SBCL 2023 AGM job is done!!

Donald · September 24, 2023, 3:37pm

Lots of new folks are unhappy with the sort of quiz-puzzle picture put up by me asking folks to decipher what we are reading into this:). Got many messages to that effect.

I thought we put this picture up in the Stock Story thread - and NOT in the SBCL main thread - so new folks (without a rich SBCL context) can quickly refer to the Stock Story and decipher for themselves. But evidently that doesn’t work so well.

So here are some quick clues.

At one point of time Isabellen Huette (certainly in 2017/18 timeframes) had over 50% market share of Automotive BMS Shunts; with the rest being shared by lots of others including Vishay, Shivalik, Panasonic, Rohm. None probably had double digit market shares.
In AGM 2022, SBCL confirmed a global market share of 10%+, and also much more on their custom design advantages, EBW Machine configuring (from 3rd party hw and Sw advantages, and much more. Instructive for all to read the AGM 2022 Notes filed by several of us attending.
We didn’t know then that Isabellen Huette pioneered the Hard Resistant Bonding Tech. Shivalik right form the start has gone the EBW Bonding tech route - and have made it their own with superior cost and custom design advantages, even probably faster manufacturing (low lead times of 20w is probably due to this as well) and gradually ramping up market share as quality/performance requirement wise it met all that OEMs required.
BUT, we still didn’t have a hold on the addressable market by Shivalik. How many of the OEM-Tier1-Tier2 relationships were frozen, where other competitors are entrenched, which relationships were neutral (and therefore potentially tappable), and which Tier1-Tier2 relationships were warming up.
In Mumbai analyst meets (see Reports filed), Shivalik mentioned that that have narrowly defined their addressable market ONLY as EBW BMS Shunts. (earlier they wanted to do other EV (non BMS) shunts such as Resistor Shunts as well. And with that Market definition, they declared (to our shock, and amazement) that ISH is NOT really a competitor - probably less than 5% mshare in EBW Automotive Shunts market.
Thanks to VP in-house domain experts/and others from the Industry, the Merc BMS Shunts supply chain is now mapped completely (more or less); it is confirmed that SBCL shunts are approved in the Bosch-led supply chain along with Wieland and another apart from ISH. Please Note ISH still commands 60-70% share of the Bosch-led supply chain to Merc. And we heard so is the case for other Tier1 suppliers to Merc like Hella and Continental.
To the discerning investor - this narrow market definition EBW shunts only - when coupled with the announcement of - 1600 Cr sales capacity (created on the back of Sales visibility of 6-7 year customer forecasts; TTM sales 430 Cr), could only mean one thing, they are steadily gaining market share/confidence of OEMs - and consequently other Tier1 and Tier2 suppliers in established OEM Supply Chains - other than just the Vishay linkage (that share has dropped significantly from as high as 70% at one time).
To my mind, this is where decision-making hinges - on where the ODDS lie - (information will always be insufficient). The smart analysts should work v v hard to establish to FORESEE if

Given all the advantages that SBCL brings to the Table (enough of that in the Shivalik Stock Story)

a) Could SBCL EBW BMS shunts one day come to command as high as 50-60% share of large Tier1s like Continental, and Hella? We know these relationships are warm - but no idea on future visibility
b) Which other large OEMs are neutral enough to work with SBCL in future (and thus we should count them in SBCL addressable market)
c) Is it possible with large multi-year forecasting, the accent is on volumes being secured (in a fractured geopolitical environment, all large Supply chains in all Industries we know are first scurrying to secure long-term supplies); We know this is happening in the Battery Chemicals segment, something like the EV BMS Market must also be seeing movement on this?
d) Looks like in Shunts/Strips segment Margins are NOW sustainable (even with volumes dropping); Is it possible that the Tier2s and Tier1s are facilitating/guaranteeing margin-secure sourcing (RM) for a player like SBCL if in turn their supplies are secured?

Disclosures/Disclaimers:
1. My views are biased. SBCL is a significant investment from 2018 levels. Above is only conjectures (in the realm of possibilities, though)
2. Like most SBCL (and Non-SBCL) investors, we didn’t like what has happened in the lead up to promoter share sale transactions, but surely someone like SBCL having built up the business over last 30-40 years have the right to monetise a part of the wealth-creation- even a fat 10% at one go; and several examples abound like Page Industries who have repeatedly sold, and yet created abundant value for all stake-holders
3. Market news is that further dilution through QIP is possibly in the offing; we are hoping to extract news of advanced dialogs for one or more significant related-business acquisition, and or some big-ticket independent factory JV/Partnership; That is the ONLY logical explaination (to my mind) of frantic market awareness/value-creation activities of recent past (when seen in the context of a normally very reticent, ultra-conservative SBCL Mgmt)

Donald · October 7, 2023, 4:17pm

Someone had asked a very pertinent question at 2023 AGM,
“Given that you have mentioned your Capex is mostly done for Sales till 1600 Cr (forward visibility 6-7 years), and your Product Mix remains mostly unchanged (Shunts/BImetals), SBCL looks to be on course to generate 600-800 Cr Free Cash Flows. Can you confirm that?” And if Yes, Will you be returning more to the shareholders?

CFO did affirm that, and Chairman Sandhuji qualified saying "Barring any big geo-political issues, YES we are on course to achieve that. I did note that down then. Today as I find the time to reflect back, was intrigued enough to bring out my (in-famous) old arsenal of Excel calculations!

Good to see my old excel sheets confirm projection possibilities.

Those intrigued on how-to-exercise of this kind, Please refer Michael Maboussin paper/tutorials on Expectations Investing (there’s the excellent book as well) - a gem of a Paper on how to forecast earnings with great accuracy!! (caveat: ONLY FEASIBLE if Product Mix doesn’t change (read working capital intensity and fixed capital intensity will be similar and can thus be projected with good accuracy), and provided you have a good understanding/grip on the business/competition/industry tailwinds to project Sales growth rate with some confidence)

Here’s my Old Excel (for those who want to play around)
Shivalik Bimetal.xlsm (137.9 KB)
(Use with care, and at your own risk; I don’t take any responsibility for errors in data/formulaic calculations; Excel geeks - feel free to cross-check/modify, and post back error-free version)

For folks new to VP and Screener.in, please note that you can upload this excel (or any excel using Screener base excel) at screener.in and you can download calculated excel like this (in seconds) on any business you like from Screener.in for FREE (yes, its free)! - probably the ONLY such utility you can find globally of such finesse; how cool is our very own @pratyushmittal !!

Donald · October 11, 2023, 2:03pm

Now that we have had some time to absorb new information from AGM 2023 Updates and also deliberated amongst friends/other investors/domain experts, let’s summarise some Key Information and go on to stick our necks out and make bold to present some Key Insights (forward-looking, that look clear to me, but of course will need some more field validation from domain experts, than what we have today!).

Disc: SBCL stock is currently at expensive levels. This post has forward looking inferences (which may all go wrong). Buying at these levels will be fraught with risks. Being Invested, my views are biased.

Key Information to focus on (only data/facts that move the needle the most!)

Isabellen Hutte commands 60-70% share of EV BMS shunts supplies to Tier1 EV BMS suppliers like Bosch, Hella, Continental that in turn supply to all major Auto OEMs. ISAH primary bonding tech is Hard Resistant Bonding, EBW bonding tech share is probably negligible. Has Patents around the Hard Resistant Bonding tech/processes.
EBW Bonding tech vendors (capable of EBW Shunt strips) include IsabellenHutte (1 EBW m/c), Vishay (3 EBW), Shivalik (8 EBW, also some are with multiple guns, so total is more like 11(?), Wieland Germany (1 EBW), Cyntech Taiwan (1 EBW), Korean (2 companies, 1 EBW each), Chinese (2 companies, servicing Chinese Market primarily).
Totally 8 Competitors globally (EBW Shunt strips capable) approved with OEMs. Effectively 5 players only in SBCL addressable market as Chinese players serve the China market, and ISAH concentrates on propagating Hard Resistant Bonding tech, has negligible EBW Shunts presence. Vishay is NOT a competitor but a win-win customer. Wieland (a major player) is a new entrant though to EBW Shunt strips, Cyntech was a SBCL customer before and new entrant, Korean players one of them also a SBCL customer before, and new entrant.
Typically the supply relationships between a Tier1 like Bosch and a Tier 3 supplier like ISAH (for a particular OEM platform) are contracted for the expected life of the product. So say for a OEM platform launched in 2015/16, the shunt supply contract is typically 10 years and running/in-force till say 2025/2026
Almost all OEMs have introduced/working on new Platforms that will be launched in 2025/2026 timeframes. Due to large number of sensors in BEV and Hybrid EVs and thus consequent proliferating errors, OEMs have now specified Automotive Safety Integrity Levels ASIL C standards with an aggregate desired accuracy 1% at the BMS level, and compartmentalised error levels for different components e.g. this 1% accuracy desired at BMS level translates to 0.05% accuracy level required at individual Shunt level (existing vehicles today have 1% accuracy requirements at Shunt level)
SBCL Tier1 customers like Bosch, Hella, Continental demand (but can’t measure) 0.05% shunt level accuracy but the OEMs can and do measure before approving. SBCL has passed this stage with all major global OEMs now.
For BEVs and Hybrid EVs that will be launched in 2025/26, it is imperative for the Tier1s like Bosch, Hella, Continental to be inspecting new supply lines (equipped for 0.05% accuracy fine tuning) at their respective Tier3s such as SBCL like NOW (read 2023 is almost over, only a year left).
ISAH has also been making Current Sensing modules (CSM) using their Shunts. And started offering the same (with BMS Housing) to the OEMs (effectively competing with other Tier1 suppliers like Bosch, Hella and Continental). OEMs ONLY care about ASIL C 1% accuracy at CSM/BMS level, they do not care whether Shunts came with Hard Resistant Bonding tech or EBW Bonding tech.
SBCL is watching the Current Sensing Module (CSM) play closely. They find that CSM design options for meeting (ASIL C with Tier1s) are still pretty much evolving and fluid. Once there is more clarity, SBCL is more likely to take a JV route with a Partner (as mentioned in AGM, left unsaid about nature of partner, any guesses? )
Wieland, Cyntech, and the 2 Korean companies (?) too have turned customers again to SBCL for some of the new platform requirements.

Key Insights to fix on (Inherently forward looking, please read disclaimer above, carefully)
We solicit more work and discussion around these with industry domain experts

SBCL is today approved/positioned well at every major Auto OEM for their EV forays through their Tier1s like Hella, Continental, Bosch and Others {need to nail these down}. For some, the positioning is very strong like in Continental and Hella (buttressed by forward visibility of 6-7 years), likely to become as big, or better than the Vishay relationship in a few years.
ISAH had been dictating terms with the Tier1s (for older launches say 2015/16 timeframes that are still continuing). For some designs (actually Tier1 provided), ISAH is known to have gone ahead and filed patents (tech process and even form-factor) with the consequence that the same Tier1 faced complete rigidity to change from ISAH, and even ended up paying Royalty to them (for their own design).
Post 2018 though - much of above has been changing drastically
a) ASIL C specs from OEMs forced redesigns on everyone (entire supply chain)
b) Other Tier1s found a way to shut out their vendor ISAH’s dominance/dictates/workaround patents
Requesting @GourabPaul to expand on this in a separate post (now you know where due credit needs to go for helping navigate through much in my above posts )
c) Is this why now EBW BMS Shunts comes into the picture big way? From 2025/26? So much so that SBCL declared in Mumbai Analyst meet that they have redefined their addressable market to EBW BMS Shunts.
(they actually had said they will now NOT focus much on the other (non BMS) EV Shunts, as that space is much more competitive (read margins not protected) and requires them to stock large number of SKUs; but this sort of narrow market focus was negated at AGM 2023)
ASIL-C accuracy requirements are very stringent (it’s like a 200x jump from the older shunts tech) and thus very difficult especially for new EBW BMS Shunts entrants to muster, fine-tune, and deliver upon. Quite likely that some of the existing (shunts strip capable) players will drop out of this game.
Very likely a few years down the line SBCL will emerge as THE primary vendor for both Hella and Continental offerings to OEMs (in addition to being Vishay’s #1 supplier). Even for other Tier1s who have NOT yet warmed up to SBCL (??)
Let’s NOT forget the other big needle-mover Insight. SBCL Management has averred time and again theirs is now a Margins-protected play (unlike 2018 glut levels). In AGM 2023 they made the specifics clear that RM price-volatility-index is calculated separately by all Customers and paid for separately, in addition to Operating margins.

Requesting EV BMS domain Experts to take this forward with their friends/contacts in the OEM industry and collaborate with SBCL investors like us to make us all better-informed decision-makers! You can add super value by
a) filling in the gaps
b) correcting/modifying above hunches to be in-tune with Reality
c) confirm/demolish say this margin-sustainability premise
"Is this common to all Shunts suppliers of Tier1s (unlikely though); Or more likely a win-win special-arrangement with the current Cost-leader, Design-leader, Process-Automation-leader, Lead-time-leader, AND capacity-leader like SBCL -for securing hassle-free future EV supply chain by Tier1s
{SBCL is known for playing the win-win respect for Customer-IP game; known for helping improve customer-costing with SBCL redesigns; never-to-compete with customer game - unlike say the #1 incumbent’s game which is probably getting derailed as we speak)

For more exploration

Wieland E-Mobility (EBW shunt strips, Shunts, Shunts-based Current Sensors)
Cyntech ASIL C and ASIL D Shunt Modules

GourabPaul · October 15, 2023, 11:33am

Need for accuracy in Current measurement:

OEMs require higher accuracy and redundancy in current measurement comes due to safety, regulatory and performance needs. The safety requirement comes from the ISO26262 standard and current measurement is categorized as ASIL C. What it means is that the shunts must not provide inaccurate results in the operating range of -40°C - 80°C. This would mean that the shunt should not expand/contract based on temperatures, variations in current. The value of resistance should not change beyond an acceptable tolerance over a 15 -20-year lifespan.
The regulatory requirement comes from Advanced Clean Cars II - California Air Resources Board and the Euro 7 for zero Emission vehicles. The standard wants to ensure that the certified range and the end-of-life criteria are stringently met. Thus, BMS algorithms such as State of charge, State of health calculation must be met more stringently. This is creating more demand for accurate shunts.
Performance needs by the OEMs are also driving for accuracy in the current measurement which is an important input for various range algorithms of the electric vehicles.

How the dominant player’s ambition is creating some changes in the supply chain.
Originally ISA had a dominant role in providing shunts to Tier1s who would further package it into their embedded system and provide it to the customers. However since 2018-19 onwards ISA had a more ambitious goal of bypassing the tier-1 and providing the current sensor modules to the OEM’s directly

The have come out with a series of shunt modules ( IVT-S Series • Isabellenhütte ) which puts them in competition with their original customers. This is where SBCL gains prominence as Donald has explained in the post above. For OEMs the order of importance for shunts will be Accuracy – Reliability – Cost and from what I know Shivalik shunts are able to clear the accuracy and reliability hurdles and are probably the lowest cost producer of the Shunts.

Issues related to IP, costs and engineering change request

Since 2018-19 ISA had been very difficult to work with for a lot of Tier-1s. The foremost challenge was how they had (mis)used shunt design IP towards their advantage with respect to cost. The shunts that ISA sold to my ex-employer was around 2-3 EUR, whereas the same shunt if bought from Weiland / Shivalik would have been around 1.5 EUR. For the TIER-1s, replacing ISA would mean that they would have to re-design the product and in many cases product combination. This would be very costly for the TIER-1s. Further any engineering change would require massive Tooling cost from ISA. I must commend how ISA has used the patent family to ringfence the automotive shunt space and its margins. If anyone is technically interested, they can go through the patents here : Patents Assigned to ISABELLENHUETTE HEUSLER GMBH & CO. KG - Justia Patents Search. Patents granted between 2015-2019 would be most relevant.

Cost saving angle for TIER 1

For TIER-1 s selling 10-20 million units of BMS, 1-2 EUR saving would mean 10-40 million saving in a single product. The BMS margins range between 5-7 % for volumes above 5 Million. A 48V , 7-9 Ah battery which is used in a hybrid application would cost around 260-300 EUR. The BMS would cost between 35-40 EUR.

My current hypothesis

As the regulations become more stringent, by 2025-30 we will have a large number of EV launches, the demand for shunts would spike during that period and hopefully Shivalik will benefit from the tailwind.

Disclaimer : Biased as I work in an Auto OEM and I have just provided my observation. We will also have to see how the supply chain dynamics play out between OEM, TIER-1/2/3

spatel · November 24, 2023, 1:43pm

Shivalik Bimetal has signed the MoU with Metalor Technologies International SA (Swiss Corporation) for setting up a Joint Venture in India to manufacture and sale of electrical contacts. Source here.

The Q2Fy24 media release has brief mention of this JV. It says -

Towards a significant strategic move, Shivalik Bimetal Controls Ltd. has embarked on the process of establishing an MoU to assess the feasibility of a joint venture with Metalor, a Tanaka group company, which is a world leader in the field of Precious Metals. Metalor, a renowned Swiss company, is celebrated for its expertise in silver contacts and state-of-the-art silver melting facilities in several locations around the world. Chairman of SBCL, Mr. S.S. Sandhu, shared, “We look forward to exploring a joint strategic partnership with Metalor in India. By conducting a feasibility study, we will assess the value addition this partnership can bring to manufacture and assemble silver contacts. This initiative affirms our commitment to pursue sustainable growth that can open doors to Metalor’s extensive global network. We hope to analyse how Shivalik’s silver contacts segment can be positioned for substantial volume growth through this venture, as we anticipate achieving greater milestones in this segment.”

(Source: https://metalor.com/wp-content/uploads/2020/07/Electrotechnics_Production_flow_Chart.pdf)

One of the most important roles of a management team and board of directors is to reinvest capital at the high rates of return. Is this JV a step in right direction (seems so)? Time will tell.