Key points from Dr.Vajay Malik blog.

• Cyclical Business Performance: The auto ancillary sector is cyclical, meaning that periods of increasing sales and profit margins are typically followed by periods of decline. The source cites Jamna Auto Industries Ltd and India Nippon Electricals Ltd as examples of companies that have experienced this cyclicality.
• Low Bargaining Power: Auto ancillary companies have very little bargaining power with both their customers (OEMs) and their suppliers (large metal producers). OEMs often have multiple suppliers for each component, giving them leverage to demand lower prices. In addition, auto ancillary companies must compete with imports from other countries, such as China. The source uses India Nippon Electricals Ltd to illustrate the pricing pressure and challenges in recouping increased production costs from customers.
• Impact on Working Capital: The low bargaining power of auto ancillary companies also affects their working capital management. OEMs often adopt a “just-in-time” approach, requiring suppliers to deliver products just before they are needed, leading to increased inventory holding costs for the ancillary companies.
• OEM Preference for Large Suppliers: OEMs prefer to work with large suppliers who can provide a wide range of products. This creates a situation where “big becomes bigger” in the auto ancillary sector. Larger suppliers have better bargaining power with OEMs and can achieve economies of scale. Minda Industries Ltd, a large Indian auto component manufacturer, is presented as a case study of a company benefiting from its size and diverse product offerings.
• Importance of Technology and R&D: Auto ancillary companies must continuously invest in technology and research and development to stay competitive. This is particularly crucial as OEMs often include price reduction clauses in their contracts, requiring suppliers to find ways to reduce costs over time. Companies that fail to keep up with technological advancements risk losing market share. Gandhi Special Tubes Ltd is cited as an example of a company that faced challenges due to its inability to upgrade its technology to meet new emission standards.
• Technical Tie-ups and Acquisitions: Indian auto ancillary companies often engage in technical tie-ups with global players to gain access to new technologies. This is partly because Indian companies tend to spend less on R&D compared to their counterparts in developed countries. These tie-ups can also help Indian companies gain business from global OEMs operating in India. The source discusses the experience of Minda Industries Ltd, highlighting both the benefits and limitations of technical tie-ups. Acquisitions are another strategy used by auto ancillary companies to gain access to technology, expand product lines, and enter new markets.
• Challenges of Acquisitions: The acquisition-led growth strategy often results in complex corporate structures with multiple subsidiaries, associates, and joint ventures. This can make it difficult for investors to assess the true financial performance of a company, as consolidated financials may not always provide a complete picture. The source points to the case of Minda Industries Ltd, where consolidated financials did not capture the full turnover of the group. Additionally, the lack of transparency in reporting investments in various entities can hinder investors’ ability to evaluate investment decisions made by the company.
• Aftermarket/Replacement Market: The aftermarket segment, which involves selling replacement parts, is generally considered more profitable and less cyclical than supplying to OEMs. However, building a significant presence in this market is challenging due to factors like intense competition from the unorganized sector, price-sensitive buyers, and the need for large investments in distribution and marketing. Despite its focus on the aftermarket segment for over a decade, Jamna Auto Industries Ltd struggled to achieve meaningful scale in this area, illustrating the difficulties involved.

Shaily Engineering Plastics Ltd –

Q2 FY 25 results and concall highlights –

Revenues – 192 vs 157 cr, up 22 pc
Gross margins @ 46.3 vs 37.9 pc ( up 8.4 pc !!! )
EBITDA – 41 vs 26 cr, up 56 pc ( margins @ 21.5 vs 16.9 pc, up 4.6 pc !!! )
PAT – 22 vs 11 cr ( doubled )

Sharp improvements in gross and EBITDA margins is due to steep improvement in sales in healthcare division which grew by 94 pc in Q2 on a YoY basis

Capacity utilisation across plants @ 42 vs 39 pc

Segment wise revenue breakup –

Consumer – 72 vs 80 pc
Healthcare – 20 vs 12 pc
Industrial – 8 vs 8 pc

Domestic : Exports revenue breakup @ 25:75 vs 27:73 in Q2 FY 24

Expecting healthcare segment revenues to grow to 25 pc of sales inside next 3 yrs ( vs 20 pc currently )

Revenues in consumer segment grew by 10 pc YoY. Have received orders for 2 new products from a big FMCG company in Q2

Have received new business from a marquee customer in the Industrial segment in Q2 ( its an automotive customer ). Revenues in the industrial segment grew by 30 pc YoY in Q2

Company expects their injectable pen volumes to double in H2 vs H1 ( pickup in volumes should start wef Dec 24 )

Teriparatide ( Osteoporosis drug ) launch is expected to first happen in EU wef Q4 FY 25 ( aprox ). US launch has been delayed

Liragludite launch should happen in Q2 or Q3 of FY 26

Semaglutide launch in RoW mkts like India, Brazil, Canada with company’s devices is expected to happen in H2 FY 26. Company is expected to expand their Semaglutide injectors capacity to > 25 million devices by H1 FY 27. Company believes, it should end up having a dominant mkt share in the generic Semaglutide devices in the RoW mkts

To sum up – Between Jan 25 – Mar 26 – company will launch Teriparatide, Liraglutide and Semaglitide in multiple geographies with multiple customers

Company’s capacity on Insulin pens is around 11 million pens. Looking to expand capacity to 25 million pens. This new – added capacity should come on stream in Q1 FY 27

On Tirzepatide – supply of exhibit batches should start in Q4 FY 25. Did not give any visibility on commercial launch

Current capacity of insulin Injectors @ 11 million. Company is adding another 24 million. So the total insulin capacity will reach 35 million. Semaglutide capacity should be another 35 million. All others put together should be another 25 – 30 million. So the total capacity should reach 100 million in next 36 months

Overall spend for all this capacity build up should be around 150-200 cr over next 36 months

Disc: holding, biased, not SEBI registered, not a buy / sell recommendation

Very Interesting point, you have raised, So Crude is currently $76 Barrel (159 liter, USD/INR 85), so 1 liter crude is Rs. 42 (approx.). Now processing, OMC margin, freight, entry tax is around 10% (please confirm, because i suspect it to be higher) in industry, bringing it to~~ approx. again 50 pretax at refinery level, then the freight, dealer commission, and of course the taxes. So, I think it gets awfully close to Ethanol costs, plus we are forgetting that crude is cheap these days. As per my view, the larger point here is, we do not have to pay for it in Dollars and we are not dependent on anyone for our energy security, so the precious dollar reserves are not wasted and to top it all off( $ 8Billion savings) , our farmers who are our food producers can be turned into our energy producers So the money stays! Let me know if I am missing something. Will share my full note on Chini tomorrow.