Continuing on this thread – I like to pen down facts and my views – so this might be a little lengthy. But perhaps some issues like low tax, high turns, increased debt, etc would be discussed. I had bought a bit of the stock a few months ago to track. While I am cagey about the astounding growth and capital efficiency numbers, I believe valuations offer downside protection.
Shilpi Cable Technologies Limited, founded in 2006, is a manufacturer of cables used in the automotive, telecom and energy segments. It specialises in radio frequency cables, copper wires, wiring harnesses, and cable accessories. At present, SCTL’s 26 per cent revenue come from telecom segment, 21 per cent automotive, 12 per cent from the consumer durables/assemblies, 7 per cent from energy cables and rest 34 per cent from copper wire conductor business.
The company has three plants, two in Rajasthan, and one in TN. The Hosur (TN) plant was put up to cater to the wiring harness requirements for a large OEM (likely Ashok Leyland).
It has an arrangement with an Aurangabad based company for manufacturing RF cables on a contract basis, which effectively doubles its capacity. This creates flexibility and also increases throughput without creating capacity. Being in an industrial hub, there is an in-built locational advantage.
Additionally, it has another arrangement with a Bahadurgarh (Haryana) -based manufacturer of wires and cables on a contract basis. This arrangement is strategic with an equity infusion into the manufacturing facility by SCTL promoters. The arrangement provides for a contract size extending to INR 200 crore per annum.
It has two wholly owned subsidiaries, Shilpi Worldwide JLT (Dubai), and Shilpi Worldwide Private Limited (Singapore).
The company currently exports to UAE, Taiwan, Philippines, Turkey and USA, with a view to widen this base in the future to South America, Africa, Middle East and South East Asia. Exports started in FY14 and contribute to 12% of standalone company turnover in FY14 (per AR14). Most of such revenue comes from the telecom segment through solutions, onsite provisioning, and trading. Tie-ups with OEs in the future could likely bring substantial business to SCTL at better margins.
Investments into the 4G/LTE technologies along with the urgent requirement to address coverage and capacity issues will give a boost to revenue from the telecom segment. While incremental additional of towers could be slow (due to expected higher tenancy ratios), the requirement for telecom cables and assemblies will be necessitated for each base station, creating sustained demand.
Within the automotive segment, SCTL caters to the 2W/3W and PV segments. According to a Roland Berger report, the passenger vehicle and 2W markets in India would grow at 12% per annum through 2020. Among the BRIC nations, this is the lowest, India has a car ownership of 12 per thousand compared to Russia at 216, Brazil at 126 and China at 44. The close correlation between GDP growth and PV demand growth could mean strong medium term growth. Current low penetration makes India an attractive global outsourcing hub, which is augur well for SCTL.
SCTL has recently announced that in 3Q16, it will launch its own brand of LED lighting under the brand name ‘SAFE’, indicating a movement into the B2C segment. ‘SAFE’ already has a presence in the wires, switches and MCB segments in the B2B segment. In FY15, the company is reported to have racked up retail sales of ’50 crore. SCTL is present in 9 states through 250 distributors and 1,200 retailers, which indicates a good coverage.
The Company announced a preferential allotment of 40,00,000 equity shares upon conversion of warrants to Shilpi Cables Private Limited at INR 65 per share, indicating the dilution at a price 50% higher than the then prevailing price. The Company had earlier announced a preferential allotment of 1,18,00,000 equity shares to several Mauritius-based FIIs at INR 30 per share, at a 200% premium to the then prevailing price. Very recently, there was an announcement of a preferential allotment of 1,50,00,000 warrants to the promoters. The conversion price has not been indicated in the press release. The practice of having preferential allotments is a concern since it dilutes the minority shareholding every time. The only solace is the pricing of such conversions which thus far have accreted book per share rather than diluted it.
Promoters (inclusive of Trust) hold 47%, FIIs own 23%. There seem to be some large holders per the shareholder pattern on BSE – if these are PAC (persons acting in concert), the free float would be reduced substantially. 78% of the promoter shares have been pledged – a concern.
SCTL has ambitious plans to raise sales to USD 1 billion (INR 6,500 crore) by 2020 through organic and inorganic means.
SCTL has shown a tremendous growth over the past 5 years. Consolidated revenues have grown at 67% CAGR, EBITDA at 53% and PBT at 61%. Despite dilutions and a bonus issue, earnings have compounded at 30% CAGR over FY10-FY15. FY15 marked the first year of a dividend payout of INR 1.00 per share.
Standalone operations pays full tax. By virtue of the zero tax structure in Dubai, and low profitability in Singapore (both these operations account for 25% of the consolidated revenues of SCTL), consolidated operations have been paying a far lower tax. Dubai operations contribute over 40% of consolidated PBT (versus 7% in FY13) resulting in overall tax levels at 10% of consolidated PBT.
SCTL ended FY15 with RoE of 37% and pre-tax ROCE of 27%. It is instructive to note that the 5-year averages for RoE and RoCE have been 32% and 25%. Due to this shrewd outsourcing arrangements, SCTL currently churns its native gross block an astonishing 18x a year. Including the working capital requirement, this still works out to 4.7x total asset turn. With a large capex completed in FY15, free cash generation would enhance as utilization increases. Interestingly, capex just in FY15 has been higher than that in at least previous 6 years! Additionally, the retail business over time could enhance the margin profile of the company. Industry PE is 30x while industry P/B is 2.5x. While this is not strictly comparable (Havells, Finolex, V-Guard have spent substantially on branding; Havells, V-Guard have other businesses; etc), there lies a large gap between SCTL and its peers.
SCTL reported a consolidated profit of INR 160 crore or earnings per share of INR 16.20 on its enlarged share base. Net Debt is 50% of book equity. Trading at 1.2x trailing book and a multiple of 3.7x on FY15 earnings and EBITDA, the security offers a good margin of safety.
Key risks, other than the concerns mentioned earlier:
The Company has no enduring brand franchise as of now (mostly a commoditised operation), and is looking to create the same with its brand ‘SAFE’ LED lighting. Enhancing the distributor network and creating further scale could take time and burn cash. However, SCTL is already present on 9 states and has a large distributor and retailer base, giving it enough reach to make a measurable impact.
The company imports a lot of material, including copper, etc, which are subject to volatile fluctuations. Since the end product is commoditised, passing radical price changes could be difficult thereby pressuring margins. However, copper is at a six year low, offering respite on margins.
The standalone operation has an interest coverage ratio of 1.8x, indicating a lower margin of safety. However, the consolidated operations have an interest coverage ratio of 3.1x, which is more comfortable.
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