Rajratan Global Wire Limited has started commercial production at its new manufacturing facility in Sriperumbudur, Chennai, for Tyre Bead Wire with a capacity of up to 60,000 MT per annum.

Hi everyone,

I wanted to share my thoughts on MACPOWER CNC at its current valuation. Recently, on July 26th, 2024, I had the privilege of visiting their plant as an individual investor. I was incredibly impressed by Mr. Rupesh Bhai Mehta, who is a true champion and held leadership positions in many group including being at the helm of Indian machine tools manufactures association as a director over a decade. I guess that helps build vision.

1 Order Book: On page 5 of the last quarter’s investor presentation, you’ll see that the order book (₹262 crores) is already higher than the revenue from the last fiscal year (₹240 crores). For further updates on the “RATE of increase in order book,” I highly recommend listening to the FY24 Q4 concall – some special mentions there.
2 Future Machines Order: The number of future machine orders is already 44% higher than last year.
3 Expansion: Against selling 1,235 machines last year, the expansion to 2,000 machines is already in place and could go up to 2,200 machines after resolving bottlenecks – that’s a 60% growth. ( Part of investor presentation. )
4 Demand: Demand is abnormally high ( con-call and my visit + industry touch points ) , and the company is selective about the businesses they onboard. They are keen on defence and aerospace projects due to higher margins and future triggers mentioned below. Clearly a sellers Market.
5 Land Acquisition: The company is about to be awarded a 35-acre land at a token rate, which is 1/2 of the Jantri rate (current circle rate is about ₹25 lakhs), making the land worth around ₹4 crores.
6 Future Projects: The percentage of future defence and high-value projects is increasing rapidly.
7 Debt-Free: The company is debt-free and management is averse to taking loans.
8 Dividend: Management hasn’t taken a dividend for the last two periods. Highest salary received by Mr. Rupesh bhai Mehta at 3 lacs per month only. Says a lot about the culture.
9 Cost Efficiency: MACPOWER is the lowest-cost manufacturer in India, benefiting from operating leverage and EBITDA expansion as scale increases.
10. FCF of 50 crores.
11. Backward integration in process to increase margins and reduce dependency on outside vendors.

Future fundamental Triggers:

1 GST Refund: Under the Gujarat defence and aerospace policy 2016, 8% of GST will be refunded to the company in the new plant ( 1.5 years away ).
2 Defence and Aerospace Projects: 50% of projects will be in defence and aerospace, which are higher-margin products. 50% can be anything else. This clause is valid for first 5 years only.
3 R&D Incentives: The government will return back 200% of the company’s R&D expenditure for their Rajkot and Bangalore research centers.
4 Capex: The new project’s capex cost could be around ₹60 crores, potentially financed through internal accruals if capex is executed in phases, as the company’s FCF is around ₹50 crores and possibly over ₹100 crores by year-end.
5 Expansion Plan: If high demand continues, the company may do a QIP to announce a massive expansion at the new facility and do a one time capex instead.
6 Multinational Tie-Up: A potential tie-up with a multinational company for CDMO is expected by the end of this financial year, which could or i should say may elevate MACPOWER from small cap to midcap to large-cap status over long periods of time. ( Network effects – specially export will then become a deep moat + technological advancement in a precision industry business )
7 Electricity Subsidy: The new plant will benefit from serious subsidies on electricity costs. Currently they have reduced 80% of their industrial electricity bills by installing solar panels.
8 Company definitely in a sellers Market.

Base Case Scenario:

In my humble opinion to see a 50% increase in revenues from last year, taking revenues to ₹360 crores with EBITDA margins of 17%, resulting in a PAT of around ₹45 crores and forward valuations close to a PE of 31 types.

Anything above a PAT of 50 Crores i would consider a Bull Case scenario.

Potential Risks:

1 Market Fluctuations: Economic downturns or market volatility could impact the demand for CNC machines. Highly unlikely though in current market conditions.
2 Regulatory Changes: Changes in government policies or regulations, especially those related to defence and aerospace sectors, could affect the company’s operations and profitability.
3 Execution Risks: Delays or issues in executing the expansion plans and bottleneck resolutions could impact growth projections.
4 Technological Advancements: Rapid advancements in technology could render current products obsolete if the company fails to keep up with innovation. Specially for new machines being announced in IMPEX Banglore event 2025 for EMS and other precision engineering sectors etc.
5 Dependency on Key Personnel: The company’s performance is significantly influenced by key personnel like in most small cap companies, and any change in leadership could impact strategic direction and execution.

Exit Strategy –

The sector has tailwinds, and the business has the strength to sustain multiple years of growth. I prefer to wait until either the EPS peaks or the valuation becomes unsustainable before considering an exit or due to cause of delayed or poor execution that would hamper growth at higher valuations.

My multi-bagger Learning’s from the reading the book named the little book the creates wealth by Dorsey in the same week and its application to my visit :

1 Look for “ rate of change “ of revenue/operating leverage/deleveraging etc etc. Rate of change often matters.
2 Having a sound management is good but good management, good execution, great product and good team is NOT a long term moat.
3 4 sources of structural Moats are network effects ( An international tie up to use their existing network for CDMO ), cost advantages ( exists in MACPOWER cnc ) and will get better with scale, Intangible assets ( Not applicable ) and customer switching ( N.A. ), A Better location ( The new plant around 35 acres that may be announced soon and its benefits mentioned above )
4 Supple side dominance with 7-9 companies owning up to 90% of indian market share. Focus on Fish to Pond ratio and not on the absolute size of the fish. A big fish in a small pond is better than a big fish in a big pond.
5 Champion capital allocator – Debt free, debt averse, pays dividend ( but refuses to take dividend for himself – refused a crore twice in the past )
6 Broadly – Moats are more absolute in nature than relative. An example of this is that the fourth best company in a structurally attractive industry may very well have a wider and deeper Moat than the best company in a brutally competitive industry.

Second order consequences and self talk :

1 To see if my company has economic moat first see its past track record of generating returns on capital. Possibly, a strong ROC over long enough periods of time may reflect a company may have a moat and poor returns may reflect ordinary execution on ground. Watch execution like a hawk.
2 If the answer to the above question is yes, ask yourself how the company will maintain them. If over long periods of time you can’t identify specific reason/s why the ROC will stay strong the company likely does not have a Moat. Keep questioning yourself.
3 If you can identify a moat, think about how strong it is and how long it will last. Some moats last for decades others are less durable.

Why are the above points important to me ?

1 My companies value is of all the cash it will generate in the future. That’s it !
2 4 most important factor that effect the valuation of my company is how much cash it will generate in the further ( rate of change of growth ), the certainty attached to those estimated cash flows ( risks ), The amount of investment needed to run the business ( ROC ) and the length of time for which the company can keep competitors at bay ( competing advantage /economic moat )

I urge everyone to study the con-call,and put independent work to build independent conviction. I currently hold a 1% stake in this business. I am certainly biased and this is just for educational purposes as i am here to share my learning’s with the community and learn to from the community too.

Always beware of which ‘E’to use when calculation of P/E only because forecasts don’t always come true. The best ‘E’ to use is your own; be cautious or reserved of possible future ‘E’ it’s your own hard earned money, build MoS. Be responsible.

Hope this added value and help in your own journey.

Some helpful links :

1. https://cdn.vibrantgujarat.com/public/1707742816561-Establishment-of-Machine-Tool-Manufacturing-Unit.pdf
2. https://www.vibrantgujarat.com/
3. Q2FY24, Q3FY24 and Q4FY24 con calls spill the beans

Q1 FY25 Concall Summary
Business Updates

• Marketing initiatives are being enhanced aggressively through clear visibility at strategic locations especially at travel locations ensuring visibility at locations of higher footfalls

Participants

Dolat Capital

HDFC Securities

BOB Capital

Axis Capital

Nuvama

PL Capital

Kotak

DAM Capital

QnA

• The growth has been across agriculture, plumbing and infrastructure and it is across the board
• On a long term basis EBITDA margins should range between 12-13% and that is a sustainable level
• The margins in Q1 are lower than the long term range primarily due to higher growth in agri space where margins are lower and also higher A&P spends which is a conscious effort from the management side
• Capacity addition will be an ongoing process as the long term outlook on the sector is positive and with CPVC becoming affordable and local production of CPVC increasing the market size of this product shall increase disproportionately
• The aspirations on volume growth are much higher than what is being delivered currently and thus capacities are being added and from a margin point of view some quarters get affected negatively due to being heavier on the agriculture side and also higher marketing costs being incurred currently
• Since the capacity addition is immediate and sales realisations take some time to reach optimum utilization the asset turn ratios will look lower currently
• The inventory will always range between 60-70 days and the top priority remains to keep good supply and thus management will not shy away from storing higher inventory
• On PVC anti dumping tough to speculate whether anti dumping will come and current PVC prices are lower for most PVC manufacturers who are struggling at current prices
• There was no inventory gains/losses during the current quarter
• Over the next couple of quarters the footprints in South and East India will be expanded on the bath ware side
• The outlook for growth over the next 2-3 years looks very good and on EBITDA margin side it should range between 12-14% with better control on receivables
• From a consumption point of view in terms of PVC India is one of the key market that is doing well and hence all PVC supplies of the world are being directed in India
• The company has seven manufacturing units with the eight one coming up in Bihar which will start in January and add 45000 tons of production capacity
• The overall industry is growing and there is no need to do predatory pricing and selling by undercutting others
• Inventory losses and gains are part of this industry and thus margins should always be analysed ex of inventory adjustements

Why the price is going down even after posting decent Q1FY25 result, any insight?