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Niveshaay Trends Trilogy smallcase REBALANCED!

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Greetings from Niveshaay!

Recommended change in allocation: 

Change in Allocation
Increase in AllocationAllocationDecrease in AllocationAllocation
Action Construction Equipment Ltd.+6%Gokaldas Exports Ltd.6%
Neuland Laboratories Ltd. +7%Rushil Décor Ltd.7%
TVS Srichakra Ltd.+7%Fairchem Organics Ltd.7%

We believe the new additions of stocks are better placed to perform in the current market scenario based on our due diligence, scuttlebutt research and price trend action.

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Why Action Construction Equipment Ltd.?

About the company:

ACE is a material handling and construction equipment manufacturing company offering products with a majority market share in Mobile Cranes and Tower Cranes segment.

i. The company is into manufacturing of

▪ Material handling and construction equipment such as Cranes, Backhoe, Tractor,

  Forklift etc.

ii. Installed Capacity (Units)

▪ Cranes – 9,000

▪ Construction Equipment – 1,500

▪ Material Handling Equipment – 1,800

▪ Agriculture Equipment – 9,000

▪ Total Installed Capacity – 21,300

iii. Manufacturing Facilities

▪ Faridabad

▪ Palwal

iv. Revenue Mix

▪ Cranes – 68%

▪ Construction Equipment – 11%

▪ Material Handling Equipment – 9%

▪ Agriculture Equipment – 12%

Investment Rationale

i. Margin Expansion expected

Steel contributes around 60% of the total input cost. With cool down in steel prices on account of government’s decision to impose a 15% export duty on a range of finished steel products. This segment accounted for almost 95% of India’s finished steel exports in FY21 and FY22. This can lead to margin expansion as the company had taken a price hike during the period of steel prices pick up. 

Margins are expected to improve from Q2 FY23 onwards as high-cost inventory would have passed through the system.

ii. Market Leader 

The Company has around 63% market share in Pick & Carry Cranes and 60% in Fixed Tower Cranes.

iii. Export Opportunity 

The company was awarded (in Q1FY23) a contract to set up an assembly plant for the manufacturing of tractors, backhoe loaders and fabrication of agricultural implements for the Government of the Republic of Ghana. 

The company will set up a plant with a capacity of 4500 tractors, 600 backhoes, 600 agricultural equipments implements and 300 tipping trailers annually. 

iv. Opportunity in the Defense Sector 

The company has received an order to supply 40 Backhoe Loaders from the Border Road Organisation, Ministry of Defence.

Why Neuland Laboratories Ltd.?

About the company:

Neuland is a leading manufacturer of active pharmaceutical ingredients (APIs) and an end-to-end solution provider for the pharmaceutical industry’s chemistry needs.

i. Business Segments
The company has three business segments namely 

– Prime API (34% of H1 FY23 revenue)

– Niche-Specialty API (30% of H1 FY23 revenue)

– CMS (32% of H1 FY23 revenue)

ii. Manufacturing capacity

– 3 US FDA and EU GMP-compliant manufacturing facilities 

-Collective capacity: ~860 KL

iii. Regulatory filings to date

-62 DMFs with USFDA 

-499 EUDMF filings across Germany, France, Poland, Italy etc

– 931+ filings total to date 

Investment Rationale

Well-established customer base:

The Prime API segment group works on molecules either with a business leadership approach or partnership with clients on maintaining cost efficiencies. In Niche/Specialty API segment group continues to focus on niche APIs with complex chemistry and working on filing IP for non-infringing processes. In the CMS business, the Group woks as a virtual extension to the developers’ R&D team and thus was able to build a healthy relationship with the customers. 

The revenue contribution from the prime API segment reduced to 42% in FY22 (9 months) (FY18:  58%), while the niche API and CMS revenue contribution increased to 24% and 30% respectively from 20% and 22% during the same period. The revenue contribution from niche API and CMS would continue to increase over the next three years while that of the prime API segment is expected to reduce to under 40%.  

Healthy relationship with top pharma players and strong research and development capabilities ensures a healthy operating margin.

The group is an established player in the market and in operations for over 35 years, and the scale of operations remains healthy. Neuland Labs has developed more than 300 processes and 75 APIs and has filed over 931+ Regulatory filings. 

Geographical diversification in revenues: 

The group caters to many clients, both in India and overseas. It consistently drives over 75% of its revenue from exports. In the CMS business, the entire revenue is derived from the regulated markets of the US, Europe and Japan. 

Recent financial performance and technical parameters

The company delivered robust Q2 FY23 numbers with ~14% growth in topline y-o-y and ~90% growth in profit. Based on the price move action, we believe this will continue to do well.

Why TVS Shrichakra Ltd.?

About the company:

  • Incorporated in 1982, it is part of the TVS automotive-ancillary group. 
  • Makers of “TVS Eurogrip” and “TVS Tyres” brands of tyres
  • One of India’s leading manufacturers and exporters of Two, and Three-Wheeler tyres and Off-Highway tyres. 
  • It is a major OEM supplier to TVS motors and many other leading brands.
  • TVS Srichakra has manufacturing facilities at Madurai in Tamil Nadu and Pantnagar in Uttarakhand with a production capacity of over 3 million tyres a month.
  • Indian Markets contributed ~86% of revenue while Exports contributed 14%.
  • In India, the company enjoys a significant market share in the OEM and Replacement markets

Investment Rationale

Capital expenditure

Over the next five years, the company has a total INR 10 billion capex plan, which is aimed at doubling its capacity in the OHT segment, increasing capacities in 2W and new opportunities in the 2W/OHT space. 

A third of the total capex is planned towards OHT space. 

The company plans to expand mainly in the higher-margin OHT segment to diversify its revenue base in terms of product and geography, as it would cater to the export market through this expansion.

The revenue contribution from the OHT segment will also double to about 20% once the facility is fully functional. Moreover, as OHT is a margin-accretive segment, its higher contribution is also likely to increase EBITDA margins gradually.

Established position in the domestic two and three-wheeler tyres industry

TVS Srichakra is one of the leading domestic manufacturers of two- and three-wheeler bias tyres and has emerged as the largest supplier to all established domestic automobile OEMs including Bajaj Auto Ltd, Hero MotoCorp Ltd, Honda Motorcycle & Scooter India Ltd, Suzuki Motorcycles India Ltd, TVS Motor Co Ltd and Yamaha Motor India. 

The company is the third-largest player in the domestic two-wheeler bias tyres aftermarket segment, supported by its network of over 3,000 dealers and healthy product range.

Exports through the TVS Eurogrip brand (off-the-road tyres for agricultural, mining and industrial use) are mainly to European, North American, African and Middle East countries. Capacity expansion will further support its market position in the medium term.

Recent financial performance and technical parameters

The company along with the industry is operating at historically low operating margins of around 4-6%. However, the company is witnessing healthy demand from OEMs with stable replacement demand. With natural rubber prices continuously correcting, we expect operating leverage to play with operating margins to go towards 10-12% in the medium term as happened in the past. Thus, we believe this is a good addition to the portfolio.


Why exiting Fairchem Organics Ltd.?

The company delivered a poor quarterly performance and we further see uncertainty across the chemical industry. Based on the technical parameters we follow, we decided to exit Fairchem Organics Ltd.

Why exiting Gokaldas Exports Ltd. and Rushil Décor Ltd.?

Based on the technical parameters we follow, we decided to exit from the same and shift to better opportunities. 

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Niveshaay Trends Trilogy smallcase REBALANCED!
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