Shivalik Bimetal AGM 26 September 2023 at Solan, HP

FY23, volume growth in Shut and Bimetal was in lower single digit. However, improved product mix assisted the company to improve realization and relatively higher growth in revenue and stable net profits. Generally, higher thickness materialize would result in relatively higher volume of sales as compared with lower thickness material. However, Value addition and margin in generally superior in lower thickness products as compared with Higher thickness product. This was main reason for higher sales value and profit growth, despite muted volume growth in FY23,

Q1FY24 was demand was adversely impacted due to Destocking. The COVID related uncertainties resulted in overstocking of goods across the channels, from the company to distributors to end customers. This was particularly true for US/EU market. The management expect same to be normalize as indicated by receipt of new orders. During last 6-9 months, slowdown in demand given necessary free time to company to focus on process improvement and new product development. While working on many initiatives, the company developed carrier of mobile phone camera. This carrier is expected to reduce the vibration while taking phots and may work as superior quality as compared with current technology usage. The product still under development and experimentation with the potential customer.

The company pro-actively, expecting good demand from Domestic and export market, invested in building up new capacity and process optimization. Advance Meter Infrastructure (AMI-Smart meter orders) for power sector provided very good and large opportunity to the company. The company is confident about its ability to supply required volume to customers (Smart Meter Manufacturer). However, given that scope of work involved, manufacturing, installation and service of smart meter for next 8 years (2 years’ time for manufacturing and installation), it would practically very difficult to implementation on scale of 25 Cr meters as reported in Media/Industry sources. Despite all optimism, considering the on-ground situation, only 2.5 Cr order under AMI are tendered. Hence, company expect expected timeline to install 25 Cr Smart meter higher than expectation from regulators. Given the current interactions with customers in export market and development in domestic market, the management is optimistic for demand growth in FY2025.

Major customers interactions give good visibility of business long term. At least 50% of increased capacity is likely to be utilized based on current interactions in medium to long term (5-7 years). Shunt share is likely to increase 65-70% while Bimetal would be remaining. The company likely to use Bimetal inhouse to manufacture Shunt/ other new products developed which would have superior margins.

Process improvement with support of AI and machine learning:

The company has implemented Fully automatic optical inspection to check surface imperfection. It has also installed resistance inspection machine. Further, it uses now online system in Automatic rolling mills which continuously monitor input and output width. As against previous approach of sample-based inspection, now the company has data about all products manufactured real time and analyses data with machine learning and use learning in developing logic for various production process. This process is continuous and assist substantial improvement in quality and process optimization.

Unit IV (Plant 2) Manufacturing unit in installed with Cold Bonding mills, Automatic thickness control and gauging tolerance of production. Reversible Cold Rolling Machine Control (ABS) is also installed. Data collection mechanism, which check batchwise performance.

Geographical diversification of production facility: Despite heavy rain in HP, the company did not even have logistic issue for a single day. Solan region has relatively strong rock. Hence, the company does not intend to diversify manufacturing to new location.

Capital allocation and Dividend payout:

Since the future capex requirement for growth are not very high as per current situation, with growth in sales and net profit, the company would look utilize excess free cashflow at increasing dividend payout/buyback in medium to long term.

The company has incurred the majority of capex to meet capacity for next 5-7 years. Going forward expect nominal maintenance capex and debottlenecking. It expects capacity (or volume) to increase over 17-18% CAGR over 7-8 years.

Lead time:

Shivalik continue to enjoy lowest lead time to manufacture product to meet customer demand. Captive manufacturing expertise, process equipment understanding, long experience of production team and relatively small supply chain results in the best lead time for Shivalik, even when compared with Global peers.

Competitive land-scape:

EBW, There are couple of players in China, one in Taiwan (name Sen tech, may be linked company but not sure, https://www.sen-tech.com/). Currently, Chinese players are not supplying in global market. Further, the EU/US players also have reservation to source supply from China. New player like Wieland in Germany has just one machine installed while Shivalik will soon get its 8th machine installed. Wieland and Sentech were customer of Shivalik for certain materials. Sentech has one machine which is also not using of continuous beam welding. The manufacturing by Sentech is mainly for captive consumption and very limited is available for outside sale.

Vishay has acknowledged that material supplied by Shivalik is superior in quality compared with their inhouse supply. Given the wide range of product, ability to provide customize product to meet requirement of customer, lower lead time and constant innovation and improvement in cost competitiveness (improving product quality and process optimization) Shivalik Bimetal is well placed in global markets for Bimetal as well as Shunts.

Further, Customer of Shivalik, majority of which are very well known large MNCs, consider Shivalik as PARTNER and Not VENDOR. One of Japanese company (not sure), honored Shivalik as one of six excellent vendors (selected from 12,000 global vendors). Other 5 vendors were EU/US companies.

While company is sole vendor to many of its customers, still prices are negotiated and also productivity gain discount is offered.

Contact business

While contact business has relatively lower margin, the scale of opportunity is huge. Shivalik understand same and intend to replicate model Similar to Shivalik Bimetal in high margin/unique value-added products even in contact business. As compared with normal margin of 8-10%, Shivalik Subsidiary intend to achieve 15% margin on large scale. While it might lower than parent, but still would give scale and better operating leverage/ROCE to consolidated level.

The company expect better prospects for Contact business from US. Previously, JV partner was from US and hence JV was not supplying to US market. With JV partner out, the company is now confident to get more demand from large US market.

End-use application/sectors:

Shunts-55-60% Automobile, 25-30% Smart Meter, 8-10% Miscellaneous

Bimetal: 70% Switchgear, 15-20% Automobile, 8-10% Miscellaneous

PLI Scheme:

Shivalik was looking to incur capex to meet expected growth in future demand. However, during the time, coincidently, second list of products eligible for PLI announced by GOI has products which are likely to be manufacture from new capacity. Shivalik has already been approved in first stage by the Private party appointed by GOI as approver for PLI scheme. In order to get benefit of PLI, further stages are need to completed and Shivalik in process to complete all stages approval.

Managing Transformation:

Shivalik was small company started its operation in Mid-eighties. It took almost 40 years to reach from nil turnover to 400 Cr. Now for Next level of growth say, revenue milestone Rs 2,000 cr, second phase of journey, management realize that they need to take support from External professionals, develop team of excellent managers, and continue to evaluating gap in capabilities. The gap once identified are filled with inhouse talent with training support or engage outside professional/consultant.

Research and innovation:

Given the innovative approach and product development knowledge involved in production process and increased involvement on non-promoter family members in research, the company is looking at protecting its IP by way of patent. They have full time R&D time now and developing R&D Patent Kit (like collecting Trial data, putting it in proper arrangement and give end results to experiments).

IP protection is getting categorized in three broad areas, Manual, process and equipment. Each category is getting properly organized to get patents on knowledge.

Disclosure: Shivalik Bimetal is my second largest holding. My view may be positively biased due to holding. I am not SEBI registered advisor. I am not recommending any investment action. I may buy/sell above mentioned stocks without informing forum. There might be communication gap from my side due to my limited understanding of business. Investor shall do their own due diligence before making any investment decision.