inclusion of smallcaps definitely give a boost to the returns of a momentum portfolio. However they also go through huge drawdowns. In 2018-19 they went through 40-50% drawdowns - which the Nifty 200 Momentum 30 index didn’t went through! So it’s all about whether you can stomach such a drawdown.
Posts in category Value Pickr
Krishca Ltd : A SME offering steel strapping Solution (03-07-2024)
Preferential equity is the best way to raise funds.Stock is reacting to that only.
Black Box: Building infrastructure for the AI revolution (03-07-2024)
The growth you’re expecting isn’t really conservative considering that EBITDA margins are growing so much and revenue is showing consistent growth of 15%.
The work Black Box does in data centers seems fairly basic (network integration, server rack management) that’s why their operating margins are so low compared to actual cloud providers. If they increase their margins, they would face the risk of being replaced by other players.
Their deal sizes are also fairly small compared to the overall size of the data center project.
I would take the $2 Billion revenue target with a grain of salt considering company wasn’t even able to reach their 7000 Cr top line this year and the reason for this was that there was a delay in decision making at client end. Why not chase other prospects and close other deals? Their order book is also a smallish percent of their annual revenue.
What would happen if you consolidate your business to a few key customers and the customers decide to renegotiate your contract? You’ll have no leverage or choice but to wait, which is what happened in FY24
Before this insane up move, there was some valuation comfort. So, I invested with a tracking amount to see how they would execute and move up the value chain. Now there is no room to add more
Aditya Birla Sunlife AMC (ABSL AMC)- An Underrated AMC (03-07-2024)
can you expand on the derating part? Why and what does it mean and why ABCL is not in bullish camp?
Indian Railways 10 Trillion Mega Capex Plan – Railway Stocks to Ride (03-07-2024)
Excellent post. Thank you very much for sharing all the minute details.
I am holding Jupiter wagon since long and recently come across other stocks like texmaco, titagarh, railtel, ircon which I am accumulating right now.
Revenue figure of Texmaco, JWL looks good.
Few interesting news to look at -
(I am invested, will add more as this space progresses further).
IDFC First Bank Limited (03-07-2024)
I started using the IDFC bank’s current account facility for a new venture, and am truly amazed by their technology platform. In past, I struggled a lot with bulk salary transfers, managing beneficiaries and other online banking issues with Axis and HDFC banks. IDFC, on the other hand, has made everything so much easier. Their platform is smooth and definitely very user-friendly.
This experience gives me more validations, to hold the stock for a very long time. Only complain is the sudden large fluctuations in stock price - feels like lot of operator activities.
Black Box: Building infrastructure for the AI revolution (03-07-2024)
Introduction
I recently came across this tweet by Abhishek Basumallick (@a_basumallick) that highlights the significant role of IT infrastructure in the world of AI.
One such under-researched and under-owned (FIIs & DIIs combined, own <5%) IT infrastructure company in India with global presence is Black Box Limited.
Originally a US-based company listed on Nasdaq (NASDAQ: BBox), Black Box faced financial troubles and was acquired by AGC Networks Limited (NSE: AGCNET), owned by the Essar Group, in 2019 for about $16.6 million (Rs. 121 crore) in cash. At the time, Black Box had revenues of $656 million, while AGC had revenues of $100 million.
Following the acquisition, AGC Networks renamed itself Black Box Limited, adopting the identity of its larger acquisition to establish a global presence. The company moved its backend operations to India, significantly reducing employee costs. This transformation helped streamline operations, reduce costs, and improve both gross and EBITDA margins, leading to significant improvements in the company’s bottom line.
Source: Screener.in
Today, Black Box serves major clients like Meta (Facebook), Amazon, Microsoft, Google, Intel and Bank of America among others. The company counts 250+ of the Fortune 500 companies and 3 out of 5 hyperscalers in cloud technology among its customers. Meta alone accounts for over $100 million in annual revenue.
Since the acquisition in FY19, Black Box has consistently delivered growth and improved margins. Management projects $2 billion in revenue within the next three years, with 10% EBITDA margins. For FY24, the company reported $756 million in revenue with an EBITDA margin of 6.8%. Company today has a market cap of little less than $800 million.
Black Box has two $100 million+ accounts and is strategically shifting to increase its share of large corporate clients while reducing its focus on smaller, less profitable ones. This approach aims to reduce long-tail costs and lower SG&A expenses and enhance profitability.
Acquisitions seldom succeed in delivering promised synergies, but Black Box is a rare success story!
More about Black Box
Black Box is a global digital infrastructure integrator offering connectivity and network
solutions, data center solutions, modern workplace and cyber security solutions and technology products to businesses globally across 35 countries in North & South America, Europe, Middle East, Africa, India and Asia Pacific regions with 85%+ business coming from North America.
According to Frost and Sullivan in calendar year 2023, Black Box is one of the leading solution integrators globally and in the US market with strong services offering in network integration, unified communications, collaborations, cyber security, digital infrastructure for connected buildings, data center solutions as well as AV solutions.
Black Box operates in two main verticals:
- Global Solutions Integration (GSI): In the GSI business, Black Box consults, designs, deploys, manages, and secures digital technology infrastructure for global customers. Their services include connected and smart campuses, digitalizing workplaces, data centers, ad networks, wireless and mobility solutions (including 5G and LTE), and cybersecurity. The GSI business contributed 86% of the total revenue in FY24.
- Technology Products Solutions (TPS): In the TPS business, Black Box sells and distributes technology infrastructure products to enhance customer experience through various channels such as online web platforms, distributors, integration partners, and value-added resellers. The TPS business contributed 14% of the total revenue in FY24.
Does Management Walk the Talk?
The company started hosting analyst concalls from Q1FY23. During this period, management guided for consistent 15-20% business growth and an expansion of gross and EBITDA margins, leveraging cost-cutting strategies by shifting work to a low-cost territory in India and improving per employee efficiency.
Throughout FY23, management consistently projected Rs. 6,000 crores in revenue and significant margin improvements in every concall.
Black Box delivered on its promises, recording revenue of Rs. 6,288 crores in FY23, representing a YoY growth of 17%. EBITDA margins improved from 3.9% in Q1FY23 to 5.6% in Q4FY23. The management successfully adhered to its guidance for FY23.
Source: Q4FY23 Investor Presentation
Management Guidance across FY24:
”As we grow from here our yield of margin is expected to get better progressively quarter after quarter. So, now the answer is we have more juice left. We would expect to go to 7%-8%-9%-10% operating margin progressively and there is enough to be done here. [Q1FY24]
On how the margins will increase - So, there are 3-4 factors. Number one of course growth itself is a factor. We expect to grow reasonably in mid double digits. So, when we grow, we expect certain of our fixed costs to get amortized in a better manner. Fixed costs are not linear in nature so therefore it wouldn’t go. So, that’s one. The second of course we’re expecting our global delivery model to mature better as we move forward. And that comes at a slightly lower cost for us, so therefore better margin. As we scale up from here, we expect some efficiency with respect to our procurement strategy as well which will allow us to get some traction on that. And as we build scale from there, we are still in the process of working through, implementing and focusing on our service now and ERP systems, allowing us to serve our back office in a more robust manner from offshore. So, a mix of growth, a mix of ability to deliver from a global delivery model, our ability to procure better on scale and more productivity or more offshoring initiative that we have left to do over the next couple of quarters. A combination of these four gives us a good chance to start to move that 6 more towards 9 and double digit figure progressively over the next several quarters. [Q1FY24]
We are confident of our guidance pertaining to this year to EBITDA targets which is northwards of INR 400 crores to INR 450 crores. We are confident of our guidance give for PAT northwards of INR 140 to INR 170 crores range. [Q2FY24]
We remain optimistic about sustaining the profitability momentum. We are confident of remaining within our stated EBITDA and PAT guideline range for the year. [Q3FY24]
However, in FY24 Black Box faced headwinds from customers, leading to delays in execution and lackluster topline growth. Revenue for FY24 remained flat at Rs. 6,282 crores, falling short of the Rs. 7,000 crore guidance. Despite these challenges, management achieved its promise of enhanced gross and EBITDA margins. EBITDA increased by a robust 59% YoY to Rs. 428 crores, with EBITDA margins growing by 250 bps YoY to 6.8%. Although the PAT guidance for FY24 was missed slightly due to higher than anticipated finance costs, profit after tax increased by 5.8x YoY to Rs. 138 crores, just shy of the lower end of the guidance of Rs. 140 crores.
Source: Q4FY24 Investor Presentation
In conclusion, despite encountering some execution delays and missing the topline guidance, Black Box successfully delivered on margin improvements and demonstrated significant EBITDA growth, showcasing the effectiveness of their strategic initiatives.
Future of the business
Black Box’s transformation is driven by two key strategies. Firstly, the company is increasing its wallet share with large customers by letting go of smaller, less profitable ones, allowing it to better focus on and grow its order book with major clients. Secondly, it is further enhancing margins by negotiating better contracts and effectively managing costs through the utilization of low labor costs in India.
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Growing order book -
Black Box has consistently expanded its order book over the years. Management remains optimistic about future growth, citing ongoing discussions with customers that are nearing $2 billion. Management is confident of achieving consistent double-digit growth, driven by the rapid adoption of new technologies like AI and 5G.
Year Order Backlog (US$ Mn) YoY Growth Mar 2021 87 Mar 2022 148 70% Mar 2023 209 41% Mar 2024 470 125%
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Increasing wallet share of large customers -
Black Box is currently evaluating its customer base, focusing on yields and potential growth. The company aims to optimize profitability by either increasing prices for low-yield customers or exiting those relationships if the potential for growth is minimal. The company is gravitating towards high-value customers, which is expected to have a positive impact on margins, gross margins, and overall profitability.
Black Box is also working with other top cloud providers, aiming to elevate these relationships to the $100 million level. Black Box has achieved $100 million in revenue with its latest customer in just 24 months, compared to the 10 years it took with the first customer. This marks the company’s second customer generating over $100 million in revenue. This achievement highlights their increased efficiency in expanding high-value relationships.
Black Box is also working with other top cloud providers, aiming to elevate these relationships to the $100 million level. Black Box has achieved $100 million in revenue with its latest customer in just 24 months, compared to the 10 years it took with the first customer. This marks the company’s second customer generating over $100 million in revenue. This achievement highlights their increased efficiency in expanding high-value relationships.
- Continued improvement in margins -
Management remains bullish on operating margins, consistently guiding for continued improvement. Over the next 2-3 years, they project margins to increase from 7% to 9-10% on the back of double-digit revenue growth. This margin expansion is expected to drive a disproportionate increase in operating profit.
Management on Long Term Margin Guidance:
”I think we are over the next several quarters we intend to improve our operating margins and heading towards more towards 8%, 9% and 10% goals. I think that’s what our objectives are. For the next three years’ time, we do expect to be exiting upward of 9% closer to 10% and I think with scale we believe that is the possibility for sure whether we can do much better than that the time will tell, but for now, over the next two years to three years’ time, we expect to move from 6.5%. I think we expect to exit this year northwards of 7%-7.5% and therefore I think we expect over the next couple of years to be able to go to the 10%.” [Q2FY24]
“so we have 3-4 levers to focus on margins. So I think one of course is our ability to sell better, renegotiate our contracts when it comes up for renewal, which we are doing. The second of course, our ability now to have our Center of Excellence in India support us because it’s mature now we put the investment for the last 2 years time. So, we are able to get better productivity from our Center of Excellence in India that allows us to have better margin. Third, of course, our better relationship with our technology vendor partners allows us to negotiate better. And we are focused on ratio centricity across our various cost blocks, both from a cost of goods perspective, our G&A perspective. So therefore, a combination of selling and negotiating better contracts, ability to get better productivity from our Center of Excellence in Bangalore, India, which is now maturing, and also our ability to negotiate better terms with vendor partners and start focus on our G&A cost. A
combination of all this has helped us to expand our margin, as Deepak said, by over 250 basis points.
We expect that momentum to continue. Our goal is to reach about 10% operating margin, and we are clearly focused over the next couple of years to get there.” [Q4FY24]
Financials
Link to financials - Link
Valuation
Time and again, management has emphasized in concalls that their business represents non-discretionary spending for customers, ensuring strong pipeline visibility.
Conservatively assuming management can achieve a modest 15% topline growth for the next three years—reaching Rs. 9,500 crore (against the guidance of $2 billion)—and increase EBITDA margins to 9% (against the guidance of 10%), compared to Q4 EBITDA margins of 8.2% and full-year FY24 margins of 6.8%, EBITDA would increase to Rs. 855 crore, doubling from EBITDA of FY24.
In Rs. Crore | FY24 | FY25e | FY26e | FY27e | FY27e - Mgmt Guidance |
---|---|---|---|---|---|
Revenue | 6,282 | 7,200 | 8,300 | 9,500 | 16,000 |
Growth% | 15% | 15% | 15% | ||
EBITDA | 428 | 576 | 705 | 855 | 3,200 |
EBITDA Margin | 6.8% | 8% | 8.5% | 9% | 10% |
Growth% | 35% | 23% | 21% |
As of 3 July, 2024, Black Box has a market cap of Rs. 6,300 crore and an enterprise value of Rs. 6,474 crore. It is currently trading at 15x trailing EBITDA and less than 7.5x FY27e EBITDA. (This is after the stock price is up 45% in last one week, without any news!)
These projections are relatively conservative and present an upside potential.
If management achieves its guidance of $2 billion (~Rs. 16,000 crore) in revenue and 10% EBITDA margins, the stock’s performance could be extraordinary.
Black Box could be an ideal investment, especially with the anticipated decline in US interest rates, which is expected to trigger a new investment cycle among US corporates.
Disc - holding
Rural Elect Corp (03-07-2024)
https://x.com/_Sandeep09/status/1803963490224476418?t=3u2iOgsxzpmRxSgHeQjCjA&s=19
PFC hasn’t sanctioned the loan to Shapoorji group till now. And probably won’t because of the social media backlash.
Indian Railways 10 Trillion Mega Capex Plan – Railway Stocks to Ride (03-07-2024)
Indian Railway Industry- A quick glimpse
Railways Industry in India is one of the largest ones in the world. For over 170+ years, the sector has been catering to millions of passengers every single day. From daily commutes to freight transfers, the widespread network of railways has been contributing significantly to the Indian economy’s growth.
India’s railway network has a long history. It dates back to the British colonial era, wherein the first passenger train ran from Mumbai to Thane in 1853. Since this period, the Indian Railways has grown exponentially. It is a state-owned enterprise comprising millions of miles of tracks, numerous stations, and a vast fleet of trains.
Railways in India operate passenger services, suburban trains, and luxury trains, too, connecting remote villages to major cities. Apart from passenger services, this sector plays a key role in transporting freight across the country.
Despite the growth and significance of the railway sector, often this industry has faced numerous challenges, that include funding constraints, safety concerns, ageing infrastructure, etc. However, the future looks promising for this sector, given the ambitious plans to create high-speed rail corridors, expansion of Vande Bharat Express network, modernization of existing infrastructure, enhancing passenger amenities, etc.
Due to these factors, many investors have been turning to this sector for investment. Nevertheless, it is better to stay updated with factors such as the latest developments, financial health, growth prospects, etc, before investing in railway stocks in India.
The Indian travel and tourism sector has seen a robust demand in 2023-24, and the future looks even brighter.
The national transporter aims to ferry seven billion passengers annually, projecting an increase to 10 billion by 2030.
To meet this and to eliminate waiting lists, the number of daily trains needs to increase substantially.
In a bid to meet the surging demand in passenger travel, the Indian Railways is gearing up for a massive investment of 10-12 trillions (tn) of Rupees in acquiring new trains/Augmenting Railway infrastructure over the coming years.
The Indian Railways plans to procure 7,000-8,000 new train sets over the next 10 years.
This move aligns with the broader plans of enhancing passenger and domestic goods transportation capabilities.
Currently, the railways are operating 10,754 trips daily,. To enhance this capacity , the railways expect to close 5,500 to 6,000 kilometres of new tracks, equivalent to 16 kilometres per day, by the end of the ongoing financial year.
These initiatives aim to free up tracks, facilitating faster movement of both passengers and goods.
Railway witness highest ever capex utilisation 100% during 2023-24 for Rs 2.4 Lakh crore,
This expenditure resulted in acceleration of rail electrification, laying of new lines and tracks, doubling and gauge conversion.
The Indian Railways is set to receive a capex push of Rs 2.52 lakh crore for the financial year 2024-25, as announced in interim budget 2024-an increase of 5 percent from Rs 2.4 lakh crore allocated a year ago.
So which are the railway stocks to keep under watch list?
Top 5 Railway stocks as per market cap: IRFC, IRCTC, RVNL, Container corporation, IRCON
State owned Monopolies: IRFC, IRCTC, Railtel, Container corporation
Railway EPC companies : RITES, RVNL, IRCON , K&R Rail engineering
Locomotive & Wagon manufacturer: Titagarh Rail, Texmaco Rail, Jupiter wagons , BHEL, Siemens (Locomotives)
Railway Ancillary Companies: Oriental Rail, Ramakrishna forgings , Concord control systems, Apar industries, Elgi Equipment, HBL Power, TD Power, Escorts Kubota
Profile of these companies along with the products and /or services they supply to Indian railway and Last 5 years financial data is given below in a link of equity.masters com
we might often get tempted to invest in Railway stocks but before investing, it is necessary to consider the factors mentioned below
Government Policies and Regulations
Since the Indian railways is a state-owned enterprise, it is significantly influenced by the policies and regulations stipulated by the government. Therefore, make sure you stay updated with the infrastructure developments, tariffs, privatisation, budget allocation, etc.
Financial Performance
Before investing any sum in railway stocks, it is necessary to evaluate the financial performance of railway companies. Run a thorough check around the revenue growth, debt levels, profitability, etc, to understand the track record of companies.
Technological Advancements
To understand the growth potential of the railway industry, make sure to monitor the technological advancements in the sector. Since growth potential indicates healthy balance sheets, therefore, keep an eye on innovation, automation, digitalization, and electrification in the industry.
Embracing such technologies helps improve safety, efficiency, and cost-efficiency, directly impacting growth. The utilisation of such tech-backed factors signifies that the railway industry is stepping up the growth ladder.
Risk Factors
The Indian Railway industry is highly prone to regulatory risks, operational risks, geopolitical risks, etc. Therefore, we should conduct a thorough risk assessment to overcome possible setbacks.
Demand Trends
The Indian railway sector is largely dependent on passenger and freight transportation. Therefore, you should check factors such as population growth, industrial activities, trade volumes, etc, to assess the demand for services offered by railways.
Should You Invest in Railway Stocks?
The railway industry has always been a popular choice for investment. Given its scale, government support, consistent growth, technological advancements, and diverse services, it has been evolving since its inception. These lucrative factors have often attracted investment from people around the country.
However, we must not forget that this sector is also often influenced by stringent government regulations, geopolitical factors, labour disputes, etc. This has frequently affected its market performance as a whole.
Thus, we should weigh all the possible factors before investing any sum in railway related stocks, along with considering our nvestment horizon.
.Top Railway Shares in India 2024: Railway Companies to Add to Your Watchlist