If current valuations sustain, this has ~50% upside in 3 years. Possibly a buy on dips on kind of stock.
Company wise, I like the management. They are continuously working on improving the market size and have enough expertise and goodwill with their current customers.
I started working on Timken around August 2020, have closely tracked each and every qtr including the parent company, and made decent money on it. But lately, the actions of both parent and Indian entity have not been shareholder-friendly. The premium these MNCs get just because of ‘good corp governance’ has to be questioned, especially during bull market.
The point of this post is not much deep diving into the business, but I am putting it here hence if anyone is considering investing into the company, can take note of these instances and can accordingly form an opinion. I do believe over long time frame, the business would grow at decent pace given the positioning of Timken globally and having cracked the tapered roller bearings which are used in HCV, railway and machines.
Below I am sharing 1 instance where I found mgmt giving wrong numbers over concall, and 2 instances for how I believe the parent entity smartly reported previous qtr numbers in a way that created optimism about the company:
1st Instance:
1st Stake sale: June 2023 – 10.1% stake for 2,361 Crs.
During the first stake sell, the company was reporting a good set of numbers, and the street was surprised that why would the parent entity cash out when the business was good, the demand in all the sectors the company is catering to are in structural tailwind, hence few eyebrows were raised. And post that, Timken delivered bad qtrs back and back and especially the weakness in exports was very much evident (refer figure 2).
Whereas there has always been talk about making the Indian entity as the manufacturing hub for the Timken Global, it seems more like in the past qtrs mgmt jacked up the inventories and reported very healthy numbers for the Exports for Timken. Since then, they have been struggling for more than 1.5 yrs for the same (refer figure 2).
Below the attached image (refer Figure 1) is my notes from the stake sale concall held by Timken India. The reason given over the call was funny, the mgmt said to ‘look at other MNCs, they have even lesser stake than what Timken India has in the Indian entity, hence nothing major – just move on with life.’
Interestingly, if you compare Q4 concall notes and stake sale call, the mgmt tone for exports changed sharply, earlier they were expecting a revival and then suddenly called out and said that they believed exports for going to be weak.
Figure 1 – Takeaways of Concall on stake sell
Figure 2 – Qtr trends for Timken
2nd Instance
2nd Stake Sale: 29th May, 2024 – 6.65% stake for ~2000 Crs.
If you will read through concall note, a clear question was asked about is railway a lumpy business for them, because if the past if you will observe, it was always in the range of 100-185, but in Q4 it was 305 Crs.(refer Image 2) But the mgmt said they feel there is no one off and quoting the same that it is about structural trends and what not.
Q4FY24 was something which was an exceptionally good for the company, and they sounded so confident over a call with exports bottoming out (which always has been a key trigger for the company).
Q1 numbers although the mgmt made it sounds like some phenomenal numbers they have published, but I would term it as weak given the kind of commentary they had in Q4 (refer figure 2). You might have a different opinion and I might be reading too much in Q-o-Q numbers, but given the timing of the stake sell, I am putting more emphasis on this.
3rd Instance
Incorrect numbers over concall:
In the Q3FY24 concall, the mgmt said over 4 times that their exports over the 9MFY24 period were down 10% compared to 9MFY23 (refer figure 3,4,5), but according to the previous numbers given in the past concalls, if you combine them, the exports were 30% down!
I had a word about this from Kotak Institutional Analyst (since they have been tracking the company since a very long), and Spark Analyst (since they host concall for the company), and guess what? They also agreed that the numbers mentioned over concall were wrong and they are also seeking further information from the company. I dropped a mail to the company, even parent entity, for obvious reasons it went unanswered.
I am putting snippets from past concall (Refer fig 3,4,5,6,7,8,9 & 10) where you can see and match the numbers from qtr number sheet (refer figure 2)
However, in Q4FY24 when giving full year numbers, it matched with the breakup of Q3FY24 they gave for exports with the overall year.
I don’t wanna explain this or put more emphasis over this point anymore, you can make whatever you want from this. All I am saying is, it is not possible that the company didn’t see the email or the analyst who literally hosts the company’s concall wouldn’t have pointed it out to the mgmt.
Figure 3 – Q3FY24 snippet 1
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Figure 4 – Q3FY24 snippet 2
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Figure 5 – Q3FY24 snippet 3
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Figure 6 – Q2FY24 Snippet
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Figure 7 – Q1FY24 Snippet (which also has reference of Q1FY23 numbers)
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Figure 8 – FY23 numbers
Figure 9 – H1FY23 and Q2FY23
Figure 10 – Q4FY23 numbers
To sum it all up throught price chart, you can just refer to below image:
Happy to be corrected if there is any flaw in the argument. Timken leads at the global level and I certainly believe it will continue to do so. But it is high time to question the companies around these stuff. I think other MNCs atleast have been transparent that they are getting good valuation and hence selling off stake.
May be you have visited a store and collected some data. The only way it could be right is they should be selling more of the other products than footwear. Is that what your learning from visiting the stores is?
Promoter holding has been consistently decreasing, and no proper answer was given for a question regarding the same in the concall.
At the same time management reiterates how well the business is doing .
Seems odd.
Hello Vikas. Do you see any fundamental change/ trigger in Sanghvi Movers?
This is largest holding in my portfolio as of now, Ashish Dixit is a real disappointment here, just playing on demerger to see what value market will give to demerged entities. 9000 cr topline and 19% margin gives EBIDTA of 1700 cr for ABLBL, with conservative EV/EBIDTA of 20-25, it many list between 340- 400, ABFRL don’t know what price market will give with pathetic balance sheet, still hoping combined valuation of 500 before of after merger by Jan 25.
Q1 FY 25-
Trigger-
TAN and other capex,
Focus to increase TAN export,
4000-5000cr capex in FY25 and FY26
Capex go live in H2 FY26.
50-55% revenue comes from TAN business.
Risk- Over- capacity of ammonium nitrate bcz Coal and BHEL have signed a JV for setting up 2,000 ton per day ammonia nitrate plant,but capex is not started yet, also Chambal is actually coming up with some kind of new capacity. As I have been telling that they have actually announced that it is an ammonium nitrate capacity which they’re bringing in. But they are also manufacturing fertilizers. So we’ll have to really see where their facilities will get utilized. .( This will mitigate by almost 25% to 30% of the demand actually is fulfilled by imports today)
We are not expecting on long-term basis any capacities which are basically going to be idle, but there could be a few quarters when the business is not doing well maybe there could be some surplus capacity.
Screenshot 2024-08-24 230409.png 408.78 KB
So the demerger happened, which is the subsidiary of Deepak fertilisers, and it is called Mahadhan Agritech Limited, which is an unlisted company. It used to house the CNB business, which is our fertilizer business and also the technical ammonium, which is the Mining Chemicals for us business. Now the Mining Chemicals business is getting carved out into a new legal entity and its name is Deepak Mining Solutions Limited. So that is the impact. And hence, there is no impact on the existing shareholders of Deepak Fertilisers.
we have 2 unlisted entities, which is one is for Mahadhan Agritech, which is an unlisted entity. The other is Deepak Mining Solutions Limited, that is other unlisted entity.
Currently both the unlisted entities are wholly owned subsidiaries of deepak fertilser and petro ltd.
So the answer is, yes, because we would continue to look for technology partners as well as strategic investors to grow those businesses. Whether it is the fertilizer business or whether it is the Technical Ammonium Nitrate business. So whatever growth which we see automatically it will show up in the holding company. So that is how it will benefit all the shareholders indirectly, but not the way that any shares would get allocated to them.
-Three division- Explosive(TAN), Industrial chemicals, Fertiliser
The capacity utilization of our nitric acid plant was closer to 90% for the quarter. And for the IPA plant, it was closer to almost 78%.Bulk fertilizer manufacturing capacity utilization was closer to 67% during the quarter
Performance Chemicals Limited, which houses our ammonia plant. Ammonia plant as you know that we basically started this plant last year in Q2. The capacity utilization in Q1 at around 98%.
As we have been telling all our investor communities that the backward integration is helping us and will help us to reduce volatility to enable us to retain the margins within the group.
The ongoing expansion at Gopalpur for TAN and Dahej for nitric acid starts in H2 FY26.Initially with70-80% capacity then go to 90-100% capacity as we did with ammonia capex(now at 98% capacity utilisation).
So we have said that the Gopalpur project, we are going to incur close to INR2,200 crores. As far as Dahej is concerned, we have said we will do around INR2,000 crores.
INR1,500 crores capex will be equally divided between Gopalpur and the Dahej in FY25 and around same capex for bot in FY26
TAN business- We currently have a capacity of around 540,000 tons right now, we are actually expanding additionally 50,000 tons, which will come upstream by the end of September. So obviously, the capacity would go up. We are looking for getting our new plant ready in Gopalpur with a capacity close to 376,000 tons. You can say around 400,000 tons, which would come upstream sometimes to next year.
50-55% revenue comes from TAN business.
So actual exports started only last quarter for TAN , which is the last quarter of the last financial year, which is ’23-2024. Now from this quarter the business will start looking at aggressively all the exports to be done.(TAN Business)
Demand is expected to remain strong in TAN over the next couple of quarters driven by growth in coal mining, power, and infrastructure sectors.
Post commissioning of this plant, we will become 3rd largest pure play TAN producer in the world.
The project is strategically located close to major mining hubs to be able to cater to their demand, while its proximity to Gopalpur port provides favourable export opportunities
IPA segment- On a long-term basis or rather short to midterm basis, this trend will continue. So, we are expecting that demand would continue for the next at least a couple of quarters or maybe a couple of years as well.
Leveraging 40 years of credible experience in Nitric Acid, DFPCL will become ‘Asia’s Largest Manufacturer’ of Nitric Acid post expansion
I’m also happy to share the positive impacts emerging from the recently announced Union budget. From a larger perspective, the Finance Ministry’s continued strong support on the fertilizer subsidies, the growing outlay for the agriculture sector, and the strong support to infrastructure. All of them will go to provide a strong and positive tailwind to all our business segments. Additionally, our recent partnership with Israel-based Haifa Group will help to promote high-performance specialty fertilisers.
NCLT Mumbai has now formally approved the demerger plans, now paving the way of unwinding each business into a separate corporate entity. So the Chemical business will be housed in 1 entity, the Crop Nutrition Fertilizer business in another one and the Technical Ammonium Nitrate Mining Chemicals in the third.
The restructuring will also open doors for strategic global investors focus on specific businesses to join us and besides that, it will also further improve the specific business visibility for the investors in general.
Now with this strategic restructuring, this aligns very well with our vision of evolving from a commodity player to one that provides specialized holistic solutions.
Now turning to our business performance. In case of Mining Chemicals, Technical Ammonium Nitrate(TAN businesss), showed a robust growth, resulting in a 23% increase in the technical ammonium nitrate sales volume year-on-year. This growth is supported by improved prices and increased demand in key end sectors such as coal mining, steel production and both showed around 11% growth.
As far as the industrial chemicals goes, the business delivered lower volumes in nitric acid due to an extended repair job at our Taloja Nitric Acid plant and partly due to reduced demand from the downstream industry following a temporary shutdown of the GNFC TDI plant, leading to an oversupply of their asset in the market.
IPA volumes were a little lower due to a plant shutdown. So that was as per plants. Having said that, our specialty products in the Chemical segment – Industrial Chemicals segment, including the pharma grade IPA and the stainless-steel grade nitric acid continued to grow based on the positive customer feedback as regards their value propositions
When it comes to the Crop Nutrition Fertilizer business, the business delivered 11% year-on year increase in sales of manufactured bulk fertilizers, whereas sales of specialty products like Bensulf have surged by 51% over last year. During the quarter, the business launched Croptek grade for soybean and Smartek grade for paddy and pulses, taking us forward in our cropspecific nutrient journey.
From an outlook perspective, as Mr. Mehta said, post demerger and the TAN business would get into a separate legal entity now. And it will establish itself as a fully integrated technology solution provider for all our customers. As you are aware that the export ban was lifted last financial year. We have already started exports from March ’24 onwards,
So we basically feel that we have a very strong case and whatever demands which the commissioner of income tax has actually saying, we continue to obviously fight that at various levels. And we will go to the highest level because we think we have a very strong case to defend us.
We are actually creating the market for it. So we’ve been telling our investors is that we will be definitely, we are very aggressive in expanding it, but it will take some time before we get there. And this will become a material till the time it becomes a material part of the business. So we are still a few quarters or a few years away from where we should be right now.
TAN business- But so far, there are no antidumping duties. But in the new budget, as you would have read is that the duty has actually been increased for importing ammonium nitrate. So 2.5% of the duty has gone up, part of it would create some kind of a deterrent for the importer, but we’ll have to see. I’m sure that the government is taking more steps to be able to at least give some competitive advantage to the domestic manufacturers as well.
State-GST benefit – Incentives for the ammonia plant. So last year, as you know, that we have actually got in Q4 around INR89 crores. For this quarter, we have done closer to almost INR35 crores. We have booked it which is prorated for the year. We expect similar if the volume obviously, if the prices goes up, it may be even higher in the future quarters.
So, we always continue to reduce debt. But there are ongoing projects, which would require new debt for funding those projects. So whether it is Gopalpur or whether it is Dahej. So overall even though we may be repaying the existing debt, but overall, the debt portion may go up because the new debts are coming in for the new projects. And it should peak out sometime next year… And hence, we would start seeing some reductions there on.
So it depends how we see it. But more or less, it should be between INR5,000 – INR5,500 crores to INR6,000 crores is what we think right now, but it can be lower than that as well.
I understand that dividends are a key metric for the company’s authenticity. However, that is not in question here given the past track record of sizeable PE investment.
Clearly, they have more capital than they need. This is why, the RoE is not justifying such a good RoA. One should also understand that giving out dividends will lower book value while improving RoE. Price to book multiple will also become more expensive.
However, the recent mild correction in stock price is due to Westbridge reducing their stake and general negative sentiments for NBFC. I feel that this stock will only perform after the complete PE exit. And for that to happen, valuations must be right for other large institutions to get into.
Otherwise, the company is demonstrating predictable AUM growth with an above-average RoA. This is just a case of a Quality business at an unfavorable price. I personally see limited downside by price, but potential downside with time.
Does anyone know what is happening to ador and its valuation.
Is it because q4 was better.
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