Thanks for the starting this thread on Sharda Motors. I have also been studying the company for the last one month and its good to have fellow VP members to discuss this stock with and gather more information on its businesses.
A few open questions for me, request folks to share answers to these if they have any insights (Especially people who may be related to the auto/emission industry). I will also write to the IR team of the company seeking answers to these questions:
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What is the share of traded items in their topline? It appears that they purchase catalysts at the request of certain OEMs and supply it to them at no added cost (Its a complete pass through which only adds to revenues not gets subtracted out in COGS and therefore adds no value at gross margin levels or below). This would help us gauge their true profitability and growth.
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What is the true moat in their products? The products aren’t very capital intensive (NFA turnover between 8-10x and doesn’t require substantial incremental capex to either increase volumes or change products for PV/LCV/HCV/CEV/Tractors). They have a large R&D Centre in Chennai with over 100 employees. Is the moat in design IP? It would be great to understand this better from some experienced folks. The industry doesn’t seem to have too many competitors, especially MHCVs and off-road vehicles due to high technology barriers. I understand that tying up with Eberspaecher gives them a technology edge, but that’s only for the JV, how strong and what are their moats for the standalone business where they supply to PVs and LCVs?
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Why is the Eberspaecher JV taking so much time to ramp up? FY22 revenues seem to be flat YOY at around 120Cr. They have two plants catering to two major CV manufacturers - my guess is Tata and Ashok Leyland? They have said that one of their CV clients has had a lot of issues in scaling up a new engine for which the SMIL JV has the exhaust system contract due to semiconductor and precious metal shortage issues. While I am disinclined to cast doubts on Management without proof, this reason does not really seem tenable to me especially in Q4 when semiconductor supplies started easing out. Could there be something else wrong with this customer’s supplies? The Q1 JV numbers will be critical to track here.
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How long are MHCVs expected to continue on fossil fuels? SMIL expects that post 2025, 80% of their revenues will come from MHCVs and off-highway vehicles where they don’t see any EV related disruption for the next decade (i.e. till 2035). How realistic is this assumption as per experts? This will have a major bearing on terminal value for the company.
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How well is Kinetic Green (https://kineticgreenvehicles.com/) placed to capture share in the Indian EV 2W/3W market? The JV with Kinetic Green is going to manufacture BMS and assembly battery packs (not cells) for captive usage by Kinetic Green 2W and 3W. Therefore the JVs success depends, to a large extent, on Kinetic Green’s 2W/3W offtake.
They tied up in Jan with a Chinese 2W manufacturer Aima and are talking about aggressively ramping up their production and no. of models
- How well and how fast can the company start exports? They plan to supply exhaust system sub-components to Tier I auto ancillaries and other non-auto engine manufacturers such as generator makers in North America and Europe by leveraging their technology and low costs due to backward integration. They are being questioned on this in every concall, but there aren’t any developments yet. Will watch this closely to check how enterprising the Management is - can it unlock export opportunities on its own?
In addition to 400Cr of cash in the balance sheet, the company also has 2 parcels of land near NCR which its willing to monetise as and when they need cash. The value of land is in 3 figures Crs. Great cash conversion, good ROCEs, high NFA turnover business, debt free with huge cash balances, legislation tailwinds, JV with a top global company - the company seems to have a lot going for it. Will the execution match the narrative?
Have a 2% position. Will add once the story becomes clearer and confidence in Management builds.
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