Permanent Magnets – Business under transformation?

Thanks @phreakv6 for starting the thread and very good write up on PML. I would like to add few more points that came to my attention and I feel are relevant from investment thesis perspective.

Metering:

• PML has been supplier to the metering companies for long time (more than 20 years), however they were supplying parts to these companies on mechanical meters which over time got obsolete. However PML navigated the transition from mechanical to electro-mechanical meters quite well by staying ahead of the curve and developing relevant products for this technology transition.

• PML has been a supplier to some of the largest electricity metering companies in the world for many years and it’s customer list includes companies like Itron, Landis and Jabil, all of them put together have very significant market share in global electricity metering market. This provides them with stability of revenue as PML is engaged with customers in new product development as they transition from one technology to the other.

• PML developed some products for these metering companies for gas meters, however over last couple of years these gas meter products reached their product lifecycle end and hence discontinued by OEM. Thus we see declining sales on gas meter side. Unlike for electricity meters, PML was supplying parts to single customer for only couple of models and hence discontinuation of single model by the OEM led to sharp decline in revenue. Management is developing some new components/modules for other technology/models in this segment however no concrete business is expected from this in near future. Thus Gas meter contribution may remain low in overall mix.

• Smart meter penetration is high in North America (around 80%) but there is still good scope for improvement in Europe where penetration is only 50%. In India it is only 1.5%. With increasing share of renewables in energy mix and need for smart grid it will become imperative to increase smart meter penetration. Thus there is reasonably large market size that exist and on top of that there will be replacement demand for existing base as typical lifecycle for smart meter is 8-10 years.

• PML has largely focused on export market on smart meter side – as the realizations per meter is much higher. In India typically PML component had realization of 20 Rs per meter while in export market it will be multiple times of that. PML is also working towards giving more module level solutions than components to increase per meter contribution.

• Overall with large opportunity size available, PML’s established position over couple of decades in this market and their relationship with all the top 3 players, one can expect steady growth in this segment.

Automotive:

• Automotive is relatively a new segment for PML and hence overall contribution is less compared to meters. However over last 5 years it’s share has grown steadily and from almost non-existent business to 25% share in revenue. PML started this journey around 2014 when next generation of promoter (MR. Sharad Taparia) rose to the helm and started transforming the company. They put in lot of efforts to develop relevant products for automotive sector using their expertise in metallurgy, casting and magnetics. As it is customary, it took significant time to crack this segment due to elongated sales cycle in automotive industry. However once they got their first entry, they have not looked back and scaling up the business both in terms of new customers, new products and new technologies.
• PML’s customer list on Automotive side includes some of the marquee names like Delta, Valeo, Siemens, Pegatron, Mahle etc. These are Tier 1 suppliers and essentially PML supplies to them. However as per process the design of PML components is approved by OEM in many cases to ensure expected performance and safety standards. This clearly indicates over years PML has gained prominent position in the automotive supply chain with marquee customers/OEMs.
• Another interesting thing that has happened (based on export data analysis) is that significant part of new customer addition happened in 2018-19 and many of those customers have scaled up business with PML year over year and are still on growth trajectroy. Customers added in FY 20 and FY 21 the same story. Thus, data points suggest that most of the new customers who start small continue to give incremental business to PML increasing their wallet share.
• PML supply current sensors, shunts, flux concentrators and magnetic shields and core for automotive segments. These components go into battery management systems, EV chargers and speed sensors. Thus PML’s components cater to both ICE And EV market.
• PML supplies to Pegatron and as per public report Pegatron was to put up dedicated plant in Texas to supply BMS and other passive electronics component to Tesla. Moreover Pegatron has large portfolio of products that is beyond automotive. As per our understanding, PML’s product and capability can be utilized in other areas too in future.
• Typical product lifecycle for some of the products/components on automotive side is 10 years to 20 years and once components is selected to be part of a program unless any major screw up happens by components supplier, the component remains part of the program. As per our understanding, PML is at various stages of program (some prototype, some commercial) and hence as and when these programs scale up (in terms of production volumes), growth in revenue can be significant.

Strategy:

• Post Mr.Sharad Taparia taking over the leadership position, he focused on building capability and competence within organization. The focus has changed from product development to capability building. This shift in strategy was made to ensure that company can insulate itself from product life cycle swings and can cross-germinate capabilities to expand the opportunities across segments rather than getting restricted to specific areas/industry. According to management in one of the AGMs PML now pitches it’s capability to customers and not the product/components.

• PML is extensively focusing on creating larger and larger pipeline of projects to counter the product lifecycles that come to an end. They are increasing the funnel of projects which are at various stages of development (RFQ, design, prototype, commercial). This ensures that while product life cycle for some of the existing products come to an end, other projects from pipeline kick in and the revenue loss is more than compensated by scale up in new projects( to counter things like gas meter share declining from 18% to 6%)
• PML works closely with customer’s design/product development team to develop new components/modules for the products thus once components is accepted and incorporated in product design, the switching cost for customer is quite high. This creates entry barrier for others to enter, at least in the same program.
• PML is focusing on increasing it’s capabilities from current sensing and casting to plastic moulding, wire harnessing thus preparing the organization to move from component supplier to module supplier. Obviously, capability building is a slow process and it will take time make this transition but over time, if they can pull it off, company can transition to next stage of growth.

Interesting fact:

• One thing that I really found interesting in PML was that even when it was 100 Cr Mcap company (and for that matter 100 Cr revenue 3 years back), if you look at their employee profile, more than 60% of employees (rough estimates based on profiles I scanned) have engineering back ground. This speaks volume about company’s focus on engineering and design. I have come across very few companies on manufacturing side who have such high percentage of employee having engineering background/

Financials:

• Even though financials are self explanatory one interesting thing is their margin profile changed from single digit to respectable high teens in 2018. This was primarily driven by GM improvement by almost 800-1000 basis points. Though this change in GM happened in 2018, the seed of that was sown in 2014 when company changed it’s track from focusing on magnet to focusing on newer segments/products with better margins. Even today, management is quite focused on tapping opportunities where the margins are reasonably good and would give pass to opportunities where revenue can be large but margins are much lower.

Risks:

• Even though PML’s top 5 an d top 10 customer concentration has come down over years, the largest customer still contributes significant part of revenue (20% plus in my estimate)
• Even though company has been able to maintain and improve it’s margin over last few years, in automotive segment typically auto ancillaries have to pass on the margin benefit coming from scale to OEMs . Thus with increasing scale, it’s realization per component may be lower in future

Disclosure: Invested since last 3 year and signficant part of portfolio. Please do your own research and due diligence as I am not SEBI registered investment advisor and this post is purely for educational purpose.