Couple of interesting things going on for Sharda:
- Have been able to capitalize the Bharat 6 emission requirement very well. Close to 35% market share in PV+LCV segment and numero-uno 65% market share ex-Maruti.
- Step-functional 2.6x growth between 2020 – 22.
- Bringing in strong partner by way of Eberspaecher for high complexity M&HCV exhaust system. The Eberspächer Group of Companies is an international automotive supplier with 80 locations in 28 countries. The company is a segment leader in the developed economies with a 75% market share in Europe and 50% market share in the US.
- This M&HCV market (6 ton+ weightage) is ~0.4M units/year where Sharda + Eberspächer group has ~15% market share only. Pace of market share gain will be slow and grinding since this is predominantly 2 OEM and 2-3 vendor market with existing established locked-in relations.
- Foraying into futuristic segments like EV battery management system by forming JV with Kinetic Green. 74:26 JV for manufacturing of Lithium batteries along with BMS for Electric Vehicles – 2W, 3W and Stationary applications. IIT Madras, will provide technology for Li-ion battery energy storage for electric 2 wheelers, 3 wheelers and other small electric vehicles to the JV.
- Kinetic is number one player in e-ricksaw segment and equally strong in 2W. Kinetic Green has got great momentum – projection of ~1000 Crs revenue by FY2023 is significant a number for nascent industry with huge TAM still to capture over period.
- Riding on growth velocity, Kinetic is looking at 3x capacity addition in next 18 – 24 months.
- Technical collaboration with China’s largest electric two-wheeler maker Aima Technology Group. As per the agreement, Aima will assist Kinetic Green in localising its products for the Indian market
- Cash-pile of ~500 Crs. (current market-cap of ~2300 Crs). Management open for inorganic avenues – preferably into EV disruption free adjacencies - so far proceeding with prudence and caution. Cherry on top – looking at monetizing two land parcels in G. Noida (indicative 3 digit in crores value).
Significant near/mid-term opportunity where company is positioned advantageously based on existing strong engagement is about TREM 4 and TREM 5.
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Annual tractor market is ~1m, export constitute of 1 lakh units.
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TREM 4 applicable for tractor engines above 37kW (50 HP) up to 560 kW (750 HP),
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Only ~13% of the tractor production will fall into the scope of TREM 4 under (>50HP).
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Also, industry is expecting some down trade between TREM 4 to TREM 5 implementation period for 50 HP+ segment since >50HP price will go up by 7% -10% to accommodate for TREM 4 requirements.
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Current projected date for TREM 5 is for April’24 covering a wider range of engines, including those smaller than 8 kW (11 HP) and those larger than 560 kW (750 HP).
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M&M has lions share of ~40% of entire domestic tractor market followed by TAFE Sonalika group and Escorts. Except Sonalika, rest three are existing customers for Sharda (2/3rd of Indian domestic tractor market). That’s why management is counting TREM 5 as significant opportunities.
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From an effective timeline perspective, TREM 5 may see significant delay to materialize since TREM 4 itself has been dragging for quite some time. TREM stage IV has seen significant delays - initially from Oct’20 to Oct’21 to March’22 to Oct’22 to ‘yet to be decided/communicated’.
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Resistance to TREM 4 and 5 implementation is twofold – farmers will have to shell out 7% -10% higher cost for owning tractor. Likewise, tractor manufacturers fears for demand/margin impact due to higher cost.
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In fact, tractor body TMA (Tractor and Mechanization Association) is putting up stiff resistance by picking holes in very TREM proposals. This whitepaper (White Paper-Emission.pdf (854.9 KB) ) makes for an interesting read and gauge the extent upto which industry body really want to stretch this. Their trump card is creating an impression of policy level conflict between MoRTH and Ministry of Petroleum and Natural gas
“In a drawbar product such as tractors, fuel efficiency and stringent emission norms tend to be oxymoronic as far as cost of ownership is concerned. Thus, it appears that the Ministry of Road Transport and Highways and the Ministry of Petroleum and Natural gas may end up working at cross purposes, as far as the farmer’s interest is concerned. “
Some negative points:
- CV JV is loss making (except recent quarter where net positive ~35 lacs). Can break even at a run rate of 200 Crs./ year
- Sharda is not into catalytic converter manufacturing by its own. They render procurement and supply chain management activity on behalf of customer for CC. For an emission system player, that leaves them with cold end products and canning work. This is reflected in the margin profile.
- EBIDTA margin in the rage of 9 – 11% including other income to the tune of 25 – 30 Crs per year. While margins are optically depressed due to trading of Catalytic converter getting added to revenue with not much margin addition.
- TREM stage IV has seen significant delays - initially from Oct’20 to Oct’21 to March’22 to Oct’22 to ‘yet to be decided/communicated’. Therefore, safe to assume that TREM 5 is going to take couple of years.
Overall, M&HCV and TREM 5 are two significant opportunities on the horizon which are as big as current PV+LCV that they have been able to convert aptly well. How much and how soon these will unfold is worth tracking. Balance sheet is very strong with debt free status and ~500 Crs of unincumbered cash. Valuation comfort is there by way of 7 times EV/EBIDTA and 13 times Price to Earning.
Thanks,
Tarun
Disc: Recent Position
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