Atirek portfolio

Entered into Goodluck India
Took position into Goodluck India today. It is nearly more than 3 percent of my total portfolio. I have decided to focus on its Precision tubes and forging business only for ease of understanding for myself.

Important things to note

• Precision Pipes & Auto Tubes segment contributes 24% to the overall revenue and 42% to the entire EBITDA proving that this is the high margin segment.
• Forgings contributes 14% to the overall revenue and 22% to the entire EBITDA and this might increase going forward.
• Issue of warrants to promoters of 30 cr. 25% percent payment is upfront.
• Company faces no competition from European and Chinese players in CDW pipes.
• Goodluck is the 2nd largest player in Precision Tubes after Tube Investments which is 2-3x in capacity plus a dominant player in the domestic markets and Pennar Industries is also one it’s competitors in India.
• Oil Refinery company needs to replace the refinery units below the sea water every year as those get eroded due to salt water and the company foreseeing a huge demand from Oil & Gas companies based out of Gulf nations
• Organised the plant visit for the analyst in August

Negatives

• Need to look into the Auto cycles
• The management keep buying and selling the the stock after the issue of warrants. Hence have a volatility stop based stop loss here.
• Company going into defence and other government contracts, hence CFO might not increase with the increase in Profits. As defence and other government contracts are minimal part of its total revenue, hence bought it. Defence is 2 percent of its total revenue.
• Overall utilization around 80%. Precision tube capacity utilisation is 90 percent as per some reports.
• Type of contracts the company is taking. As per the credit reports → Exposure to volatility in raw material prices and intense competition: GIL is susceptible to volatility in the price of key raw material, hot-rolled coils, which accounts for 70% of the total raw material cost, as the company is unable to pass on the impact of increase in raw material prices to customers in short-term contacts. In the long-term contracts, change in price is passed on only after 1-2 months.

Thing to track
Need to look into their long term debt and their cashflow from operation in coming quarters.
Precision tubes capacity utilisation
Need to find the reason why the company cash flow from operations is volatile → Maybe due to GI pipe business

Growth

Increase in margins
The forging business and the Auto tubes(and precision tubes) is the high margin business. It started with GI tube and is expanding into the value added products. Even for the low margin business of GI tubes they are forwarding integrating into Tracker tubes essential for the Solar energy sector to increase the margins.
Sales guidance (Overall): FY24 – INR 3,500 crores and FY25 – INR 4,200 crores.

Capex
60ktps capacity in Precision Pipes & Auto Tubes, should start running by Q1 FY25
Forging capacity increased from 12k MT to 30k MT recently

Deleveraging
Plans to reduce the long term debt but the short term debt required for the working capital needs is increasing.

New products introduction
Going to build the tracker tubes required in solar industry from the low margin GI tubes

Profitability
Company is increasing the profits and sales at the healthy rate.
Over next three years Management plans to increase share of value-added products to around
75% from current levels of 64%

Exit criteria
Volatility stop on monthy candles

Managment
Still learning about it but there is one thing. In one of the concall they said they have pass through agreement in case of raw materials but it seems from the credit report that the pass through agreement is not there for the long term contracts.

Valuation
PE expansion is possible as it is not highly valued in comparison with its competitors like TI and Bharat forge. But its competitors are market leaders and hence it might not get that valuation until and unless it becomes a leader.

Tailwinds
Got of good investors like Sageone entering it.
Capex and margin expansion
Warrants issued to promoters
Auto cycle upturn