Uniparts India Limited

Stock Opportunities
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Thesis

Uniparts India operates is a ancillary in OHV segment catering to tractor and construction equipment OEMs and aftermarket segments. Most sales are in US and EU. Uniparts stands to benefit from China + 1, Europe + 1, from the $1 tn dollar infrastructure bill in the US and improvement in farmers’ disposable income in EU due to increase in food prices as a result of Ukraine Russia war.

The company has a pricing advantage compared to it’s peers as 95% of production is in India (EM) and sales are mostly at prices in US and EU. Competing with players based in EU and US on pricing, nature of the product being a value added product and long standing relationships with OEM clients gives the company a competitive advantage

Risks

  • Black box in terms of how a competitor from EU or US can set up similar manufacturing and distribution capabilities in India. Since the company is making ROCE of 30%+ and ROE of 27% (set to improve even further), it’s only a matter of time before someone wants a piece of pie of such high profitability
  • Lack of formal competitors making it hard to compare

Questions

|1|Run rate maintenance capex? And for guidance given on growth how much growth capex to be incurred in the next 3 years?
|2|We regularly evaluate existing manufacturing portfolio as well and undertake calibrated relocation of manufacturing any identified products to optimize cost structure and resulting margins - Page 164 of DRHP. Do we have any other examples other than the one undertaken at the US plant?|
|3|Is Warehouse inventory primarily to cater to the aftermarket segment or OEMs? |
|4|Is high number of Inventory days a normal in this business? Some of it is due to the warehousing model - but the number is still very high. What is this compared to peers?|
|5|Why not remove all manufacturing from US and produce in India when there’s a cost advantage? Where is the cost advantage - Raw material, manufacturing, labour, others? If you can quanitfy with respect to a comparison with peers|
|6|For setting up new greenfield capacity.At what quantity of sales can we break even? How much capacity needs to be set up? How long will greenfield capacity take? How much will be the capex? How will this be funded? To acheieve breakeven sales - how big should the dealer network be? How long will take to set up warehousing and distribution? Distribution channel economics? What is the entry deterring price for new competition?|
|7|We’ve developed new products for ATV segment yet there’s no R&D expense in P/L, could you explain how do you look at R&D as a company? And how do we account for such expenses? |
|8|Could you share the succession plan policy? If publicly available, please share where we can access|
|9|In the past, have we endured any downturns? How has working capital moved in those years?|
|10|Number of employees - At the end of the year for the last 6 year including temporary and permanent staff|
|11|What is the cost of 3LP and PMP (AJ) as a % of tractor and construction equipment?|
|12|Unit economics? For both 3PL and PMP - through all channels - whether OEM sales or through dealers|
|13|- What are the terms of trade at different volume levels of business for a customer?|
|14|What is the frequncy of pricing adjustments to be able to pass on falling or rising raw material/any other costs? What is the % of fixed cost contracts vs total contracts in value terms?|
|15|Replacement cycle of the 3PL, PMP and ATV 3PL?|
|16|Who are our top 5 OEM and Retail customers?|

Please do share your inputs - if there’s anything anti-thesis or if you can help me find answers to the above questions
Thanks :slight_smile:

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I don’t know answers for all the questions as i recently took an exposure and still in the studying phase

  1. In almost all the interviews, he said their business is asset light. If i am not wrong, less than 50% of the CFO they will spend on capex
  2. Warehouse model is exclusively meant for the Just In Time supply
  3. Inventory days is high because of the warehouse model(60 days) and inventory on the sea which adds another 60 days
  4. its in low single digit
  5. On a quarterly basis.
  6. They don’t cater into retail directly. They have all the top 10 clients in the Agriculture and top 5 in the CNF.

I had below couple of observations
I saw resignations of 4\5 CS between 2020-2022. And they have accounted past(FY2020) CS salary expenses in the FY22
In FY2017, observed that both the MDs are taking remuneration from the subsidiaries than from the parent company

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Good you tube video to get overview about company

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I have asked around about this company - Word on the streets seem to be that people have doubt regarding the high margins and it’s sustainability.

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Management expects improvements in the upcoming fiscal year, specifically from FY 2024-2025. They also plan to maintain the current Healthy Dividend policy.

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Has anyone come across the actual names of any of their clients?

Edit:

In Fiscal 2019, 2020 and 2021 and in the nine months ended December 31, 2021, revenue generated from the agriculture and CFM segments together constituted 95.59%, 95.74%, 96.07% and 95.42%, respectively, of our total revenue from operations. Our customer base comprises a number of the global OEMs and in our experience, our ability to serve such customers has allowed us to scale our operations over the years. We have long-term relationships with global OEM players in the agriculture and CFM sectors, such as Tractors and Farm Equipment Limited (“TAFE”), Doosan Bobcat North America (“Bobcat”), Claas Agricultural Machinery Private Limited (“Claas Tractors”), Yanmar Global Expert Co., Ltd (“Yanmar”) and LS Mtron Limited. We service several organized aftermarket players and large farm and fleet retail store chains in Europe and the US, such as Kramp Groep B.V. (“Kramp”) and Tractor Supply Company (“TSC”). As of December 31, 2021, our customer base comprised over 125 customers in over 25 countries globally. Bobcat, TAFE and Kramp are some of the customers with whom we have had relationships for over 15 years, while with customers like Yanmar, we have a relationship with for over 10 years. More recently, we have added TSC and Kobelco Construction Equipment India Private Limited (“Kobleco”) as our customers. Customers we acquired in 2017 onwards, accounted for 4.80%, 6.97%, 11.13% and 9.62%, respectively, of our revenue from operations in Fiscal 2019, 2020 and 2021 and the nine months ended December 31, 2021.

From DRHP: SEBI | Uniparts India Limited - Prospectus

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Uniparts India Limited

OVERVIEW

Uniparts is the global manufacturer of precision parts and systems for off highway vehicles. The off highway vehicles include tractors, ultra terrain vehicles etc, construction and forest machinery (CFM) etc. The company primarily manufactures 3 point linkage systems, precision machine parts and adjacent product verticals like power take offs, hydraulic cylinders etc. These parts are structural and load bearing parts and hence subjected to strict specifications and load tolerances checks.

The company was incorporated in 1994 by first generation entrepreneur Mr. Gurdeep Soni in Ludhiana as a supplier to OEM’s to European players. By 2000, it established its manufacturing facility in Noida. By the mid 2000’s, the company was the major supplier to John Deere. Currently the company has 5 production facilities: 2 in Noida, 2 in Ludhiana & 1 in Vizag. Besides this, the company has 2 warehousing facilities: Augusta & Eldridge.

Business Details

The image attached below is of 3 point linkage. It gets attached to the tractor and carries different equipments like ploughs.

The power take off is an additional attachment which transfers the power from the main machine to the equipment which does not have any power source

Uniparts has an approximately 17% global market share in 3PL systems and 6% global market share in precision machine parts of the CFM industry. Besides this, the company also caters to the aftermarket segment for 3 PL range. Aftermarket means that the company supplies to players like O’Reilley Auto parts so that the customers can come for their requirements post the purchase

Uniparts offer fully integrated engineering solutions from conceptualization, development and validation to implementation and manufacturing of our products. The conceptualization stage involves acquiring market intelligence, assessing customer requirements and formulating customized strategy for individual customers. The development phase includes product designing, material procurement and processing. This is followed by the validation phase, which involves prototyping, testing and feasibility analysis. Revenue from the agricultural segment contributed 70% while CFM contributed 25% of the total revenues.

The clientele is extremely long term with contacts running for 15+years. The company is having the various capabilities under its wing namely forging, machining, welding etc. This enables the OEM’s to get the products designed and developed in house. This is the major competitive advantages where Uniparts is not just the component manufacturer but engages with the client from designing to development phase to offer a high level of customization. As a result, they have over the years introduced several products to product portfolio including rear hitch, front hitch, hydraulic lift arms, PTOs and trailer hitch which allows them to offer integrated system solutions to meet customer requirements and move up the value chain. The major raw material for all the manufactured parts is steel.

UIL follows a global delivery service model with manufacturing facilities and warehouses across geographies. This helps it provide multiple delivery options to its customers, wherein they can either opt for premium priced local delivery (for products manufactured in a nearby plant or stored in a nearby warehouse) and benefit from lower lead time, or for competitively priced offshore delivery (from a relatively low cost manufacturing location, such as India) that entails a higher lead time.

However there are few concerns. There is a big revenue concentration from the top 5 clients. While this sounds a big concern, these clients have been existing with UIL for a long time.

Uniparts India Limited 2020 2021 2022 2023
Top Client 36.87% 34.15% 32.78% 35.21%
Top 5 Clients 61.18% 58.32% 56.10% 56.45%
Top 10 Clients 74.62% 73.08% 70.42% 71.30%

Let’s look at the capacity utilization in their manufacturing units:

Sum total capacity utilization is 76.6% which is pretty high. Now keeping these 2 contexts together, it might be possible that the company has strategically chosen smaller short tail clients so that their capacity utilization remains optimal. Had they started onboarding larger clients, they might have had to undertake the capex. But having said that, the client concentration poses a significant risk at the company level.

One interesting piece to note about this business is that the company used to enter the long term contracts with OHV OEM’s earlier. However with the increasing competition, the OEM’s have to frequently introduce new models or make modifications to existing models. Hence they provide the estimated demand to UIL which further plans its production schedule as per the data which is received. However any unforeseen disruption at OEM operations (like strikes, lockdowns etc.) can have adverse impact at UIL.

The company is cyclical where the sales of its parts depend on the agriculture sector which is further driven by a lot of factors like climate, cost of fertilizers etc. On the other hand the construction segment is driven a lot by macroeconomic policies, interest rates etc.

Financial Details

As outlined earlier, the sales are highly cyclical which is seen in the following graph:

The EBITDA margins are shown to be in the cyclical range in the above graph. However, the company is able to pass the raw material and freight rate increase to the customers due to highly specialized ancillary partnership

The company is having a working capital cycle of ~150 days which is quite high considering the high dependance on Europe & USA (74%) markets. However, the ROE has been consistently above 20%.

There are net profits of 598 cr from 2019 to 2023 and the net cash flows from operations of 620 cr in the same period indicating a good cashflow conversion situation for the company

Management & Related Party Transactions

The company is led by Mr Gurdeep Soni and Mr Paramjit Soni both of which were paid the salary of Rs 5cr each. The sitting fee amounted to Rs 30 lacs for all the directors in the company. Besides this, there were 3 Key Management Personnels (KMP’s) which were paid Rs 1,82,00,000 as average. The total remuneration comes out to be Rs 15.76 cr (31.82 cr+25cr+30 lacs). This is pretty under the radar considering the net profit of 176 cr.

The company’s structure is as follows:

UIL is having 4 subsidiaries which are 100% owned:

  1. Gripwel Fastners Pvt. Ltd.
  2. Gripwel Conag Pvt. Ltd.
  3. Uniparts India GmbH
  4. Uniparts USA Ltd.

Uniparts USA Ltd. is having a 100% owned subsidiary Uniparts Olsen Inc. The job work of UIL is contracted to Gripwel Fastners and Gripwel Conag which is minute and amounts to 71 lacs. A loan of 5.25 cr was given to Gripwel Conag for working capital against which 3.9 lacs as interest was charged. Other related party transactions look relatively clean

Thesis

  • Niche manufacturing and a full scale solutions provider rather than just an ancillary vendor
  • Top 5 OHV companies in the USA are the clients of UIL indicating technical expertise (Bobcat, Caterpillar, Case New Holland etc.)
  • Focus of the company on ancillary segments like UTV (utility terrain vehicles) and tractors with >70 HP
  • Conservative Management, focus on free cash flows, ability to pass hike in raw materials & freight to end customer
  • China+1 factor to power the sales of this company
  • Revival of US farming sector from 2024 onwards (Link). This is due to the fact that the inflation had eaten into the incomes in 2023 since there was a large stocking which happened in 2022. 2023 was the year of de-stocking for farming sector
  • With the China dumping of agrochemicals, the prices are at lower end which is expected to benefit farmers to modernize their equipments

Anti-Thesis

  • Cyclicality in both agriculture & CFM sector
  • Client Concentration risk where top 5 clients derive 55% of topline
  • Short term contracts with OEM’s which can lead to overproduction/underproduction thus leading to adverse impact on bottomline

Valuation & Conclusion:

Since their margins are not impacted owing to the cyclicality of the business, assuming the modest current price to book of 2,8 and price to earnings of 14, there is a lot of room to re-rate. Globally auto ancillaries in the heavy equipment space trade at 5 times book value. With the moat of precision manufacturing, I believe the company has a bandwidth to deliver a fairly decent returns (20%+) CAGR for the next few years to get in line with the global competitors trading metrics.

Credits: @bharatbetpf for the recommendation

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Any reason, stock is not performing in entire market rally and close to IPO price.

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Slowdown in US agriculture

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Background

A preferred supplier to global off-highway vehicle market.
Uniparts is present both in the OEM and aftermarket segments in the off-highway industry with strong global operating model and wide customer base comprising of over 125 customers from across the globe.
Our products are shipped to over 25 countries worldwide

Basics

  • 5 production facilities + 2 Warehousing facilities
  • Off-highway market size: 200bn$
  • 2 core products: 3PL[1] (17% global mkt share) & Precision machine parts[2] : $1bn (6% global mkt share)
  • Adjacent products ($10bn): Power takeoff, Hydraulic cylinders, Fabricated assemblies.
  • key Competition
    • 3PL over 70HP
      • CBM Italy
      • GKN Walterscheid Germany
    • <70HP
      • Delica in Japan
    • PMP
      • General Grind (USA)
      • China One

[[Q3FY24]]

  • North America agricultural equipment market demand continues to be soft and in the short term, especially for smaller equipment

    • However, inventory destocking appears to have bottomed out.

  • Europe: stable to marginally down

  • Domestic: soft

  • New orders

    • 1st shipment to 2nd largest retail store in USA (Lowes? Home depot?); has 800 stores[3]
    • 1st shipment to world’s largest construction equipment OEM (CAT?) started (9-10mn$ plan or 80cr)
    • Pilot batches of 3PL for UTV’s started (opp of 20-25mn$ ie 160-200cr opp. over 4-5 years)

Lead times for new products

  • Aftermarket: 4-6m
  • OEM (say new :tractor: new model): upto 2yrs
  • Outsourcing of existing :12months
  • Gross Margins
    • 64.5%
    • With freight: 60-61% (~3.5-4.5%)
  • Growth next year:
    • Mid teens in revenue and margins around 20-21%.
    • Decrease in large ag business expected due to slowdown in US agriculture

  1. lifecycle of 8-10years ↩︎

  2. lifecycle of 5-7years ↩︎

  3. This is second (800stores) after Tractor Supply which has about 2200 stores (10mn$ account or 80 revenue). They expect this to scale up accordingly to 4mn$ rev or 30cr in 2-3 years) ↩︎

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Since Abakkus has invested in this company, was checking the numbers.
After IPO, margins by come down a lot - 4%. what is notable is Employee costs has contributed 3% (of 4% reduction) - it is quite a large number. impact is even more as sales coming down. Has anybody checked this.
it seems abakkus has got stuck in wrong company.

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Someone posted their analysis of Uniparts on Twitter:

https://x.com/FalakKalyani/status/1758821374548750487

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Ma’am, you are correct but in my opinion the company is stuck in the agriculture downcycle where a lot of destocking is happening. Case in point: Agrochemicals which is in the same industry
The company has repeatedly pointed out that 2021 margins were abnormal and the stable state margins are 21%,14% and 7% at EBITDA, PAT and FCF levels.

Disclosure: Invested

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I would agree, Uniparts as much as they discuss they are agriculture related it is important to appreciate that in the US agriculture trucks are much higher HP than what we see in India. So firstly, Uniparts is not as agri focused as they might highlight. They saw strong revenue numbers in Covid due to people using their tractors for leisure in the US but with inflation and other things going on people have left this behind. Uniparts is more linked to discretionary expense as opposed to agri cycle. If you see their customers John Deere have actually done well on Higher HP segment but lower has suffered which is where Uniparts participates.

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Key takeaways from concall

  1. Expect flattish growth in FY25 with Q4 showing some meaningful recovery. Hoping to maintain margin (20%) despite volume contraction
  2. Aftermarket segment (15% of revenue) seems to have bottomed out on inventory
  3. Large ag (20% revenue) customers showing slowdown. Small ag showing some growth (28% revenue)
  4. Construction segment degrowth in initial stage (37% revenue)
  5. India geography flat (15% revenue)
  6. Large customers John Deere and Caterpillar have reduced demand (large ag)
  7. Working on a 3rd product line after pmp and 3 point system to diversify
  8. Ongoing discussions on Mexico (near shoring) with clients
  9. Expanded south korea clients
  10. India to be a decent market over a period
  11. Dividend policy continues

Disc. Have a position as of now, may change later. Dividends policy is pro shareholder friendly. The industry (ag and construction are slow moving and interest rate dependent), no quick turnaround here. Thanks

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Sunil Singhania had 2.3% of his portfolio in Uniparts and bought it in Dec 2022 to March 2023 when the price was upwards of 500. Dividend yield itself is 4.5% and trading at 15 PE. A value buy or a value trap?

Looks like Sunil is reducing shareholding here and that maybe causing unwinding. My thought is during bad times, folks withdraw/redeem and fund has to meet redemptions by selling

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