Tracking the bulk deal of DSP Blackrock valuing about of Rs. 41 crores, I was going through the company, which is now in limelight through a series of brokerage reports. I have no idea about promoters’ background and would love to get inputs on the same.
Apparently the consensus of these reports are that they seem to have have few advantages, like …
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Since they manufacture the inputs for towers in their inhouse Angle Rolling Mills, based in eastern India, they have 2 - 3 percent cost advantage due to proximity of raw material source and lower labor cost — I am trying to understand the validity of this argument as this type of backward integration has some disadvantages too especially when tower erection happens in very remote locations (transport cost) or if you need to produce sub optimal batch quantities as at times the economic batch sizes may be quite high. So, how beneficial the backward integration is in the long term success of Transmission Tower business especially during the next downturn of economic activity (may be sometime away but still important to know to slot the business quality). They must be buying Long Billets and, to get good price., they must have entered into some form of Guaranteed Offtake Contracts … How much commodity fluctuation they have to bear and how much they pass on to customers like PGCIL?
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Their export foray and present order book is quite impressive and would be interesting to know what are their key strengths vis a vis KEC / Kalpataru apart from the price advantage mentioned by management and the analyst reports. Also, how sustainable is the order book beyond the infrastructure upturn cycle and on a Run Rate basis? How will they sustain the momentum over time? What is the key “pain point” of customers they are addressing which will keep them at an advantageous position in a very old and competitive business? It is key to build a long term conviction.
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Their asset light PVC foray with RM assurance from Sekisui would make them a competitor of importance provided they can create a brand like Astral or Aasirvad (with Lubrizol RM). Presently they are mainly into rigid PVC space which is used in Agri sector and as per management the realization is low at around Rs. 75000/- per ton. Their CPVC capacity currently at about 2000 MT and realization may be in the range of Rs. 250000/- to Rs. 300000/- per ton. Now management already expanded the capacity from 12000 Ton to 40000 Ton without much stretching the balance sheet, It is commendable. But, as Jain Irrigation is also coming with Sekisui supply assurance, I guess, the competition in the space would heat up between incumbents and the newcomers. How quickly and effectively they can establish their brand image beyond East India would be key to their success. Since they are using Leased Land and Infra, management claims to have project set cost per ton of PVC would be Rs. 7500/- vis a vis Rs. 20000/- for competition. It would be a huge advantage if they can make a market pull for the product in next 1 - 2 years time. Management expects 100% YoY growth in PVC sales.
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Wavin is also roped in by them for adhesives and fittings in plumbing business … So technologically it may be possible (not sure) their product and service set offering would be same as Astral or Aasirvad… Is the assumption correct in CPVC space? Are they like to like comparison?
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With reduction is debt over next 3 years, benefit of INR depreciation and buoyant infra spending, the company may be in a sweet spot for next few years if we can understand their competitive advantages in a more granular level.
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One positive thing is company pays full tax.
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One strange thing I found in placement document (2014) is in spite of being an engineering company of Rs. 1000 + crores, among key management personnel there is only one graduate engineer. I am not at all sure about the management bandwidth and execution capacity in these types of organisation structure.