Some additional comments from the call to what you and @ankit_george have covered
The good
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The management has provided a mid-term (ambitious) guidance of Rs 3,000 cr revenues by FY28 for the first time (to my knowledge) / 40-45% growth for the foreseeable future (in TV interviews) – which adds up to a similar number
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There have been some bottom up numbers to support the target by FY28 which gives some visibility:
– Incremental revenues from new customers (Thales, GKN Aerospace, GE Renewables): Rs 600 cr
– Incremental revenues from Products (in FY24 itself): Rs 120 cr
– Incremental revenues from Fluence (energy storage): Rs 400 cr (in final discussions as customer)
– Incremental (?) Nuclear – Rs 150 cr (Rs 600 cr orders in next year and a bit to be executed in 4 years)
– Incremental Space – Rs 150 cr (they have previously talked of 30%-35% CAGR in this area)
– Additional from Bloom electrolysers which will go into volume in FY25 (or perhaps CY25) -
The revenue seems to be supported at a gross margin of 52-53% going forward
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Employee cost will be single digit % of revenues in 2 years (this sounds like a huge bump in EBITDA margins depending on if you interpret 2 years as FY27 )
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Management continues to be transparent on causes for lower profitability in 4Q (gross margin affected by mix and one of air freight costs, EBITDA affected by employee costs)
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De-risking the very high single customer dependence
The not so good
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After @vnktshb highlighted the high WC concern, it has worried me. If I look at the company valuation using a DCF, even with a significant decline in NWC days from 230 to 120 by FY27, there is still a drain on the conversion of OCF to FCF (assuming a close to depreciation % incremental capex) which results in the DCF showing a rather low valuation compared to today (although a PE valuation would show significant “under-valuation”). The reduction of NWC from 230 to 120 should be achievable over this period as 50% of NWC is related to short term sales inventory (whereas 25% is related to stocks in transit which will likely ease with supply chains returning to normal and 25% is related to nuclear which the management feels is a one-off). I could argue that a high growth business will have high NWC (if it is inventory driven) as the forward growth is significantly higher (40-45% is crazy high in my view) – but as growth moderates to more reasonable levels the NWC days could also moderate to more reasonable levels. Additionally, a business reinvesting its profits for growth is one that is typically attractive (of course assuming at some point it starts throwing back cash). However this is a key area to focus on and depending on whether the market is valuing it on a DCF basis or PE basis, would have implications for the share price over the next few years. Strangely this business feels like if it had a more reasonable growth profile with a lower NWC requirement, it might command a higher valuation (for me – not to generalise).
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The lower profitability of 4Q was primarily down to a one-off salary hike / bonus (not clear) – apparently without a market trigger. Also the management claims it was targeted more to shop floor workers and engineers rather than management. This was positioned as being an investment to ensure key workers are in place for future growth. While this could be interpreted at face value as being very proactive and a strong foundation for growth – one of the participants had a good question to ask why was this not planned / budgeted for in the beginning of the year (no good answer)
Conclusions (for me)
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The business still looks like a high growth business with sustainable moats (can discuss this separately if not covered already in the several posts before) with a reasonably straight forward management team – will continue to remain invested, but will expand position size in a very gradual manner (have already a near full position based on my risk assessment)
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Will continue to track key cash flow and NWC metrics to understand better
Would appreciate any comments from others who have a better understanding of inventory led NWC in manufacturing related businesses and how to think about this.
Disc: Invested and likely to be biased
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