Q4 FY24 Notes

Q4 FY ’24 Revenue Dip and FY ’25 Outlook Summary:

• Delays caused by MSME norms and 45-day payment system, resulting in held-back orders.
• Optimistic outlook for Q1 FY ’25 with anticipated improved performance from pending orders.
• Impact of MSME conditions notable, affecting credit periods and leading to order hold-ups.
• EBITDA margin dip for FY ’24 attributed to increased expenditure on exhibitions and expansion efforts.
• FY ’25 margin guidance aims to maintain existing margin with slight improvement, expected range between 20% to 25%.

Market Update and Inventory Status:

• Pursuing entry into Saudi and U.S. markets through API certification.
• Inventory: approximately 10 crore in finished products, remainder in work-in-progress and raw materials. Anticipating 70% liquidation in Q1 FY ’25 post MSME resolution.

Capacity and Expenses:

• Current capacity: 96,000 pieces per day, 85% utilized.
• 30% increase in employee expenses due to expansion efforts.
• Delay in CAPEX execution for bathroom faucets due to API focus.
• Initial plan to import faucets from China, gradual utilization of CAPEX as market develops.

API Certification and Orders:

• API compliance expected in Q1, certification by August/September.
• Early-stage talks ongoing for $2 million orders. Anticipate orders upon API compliance.
• Collaborating with Canadian partners for API products.

Competitors and Market Positioning:

• Competitors in API-related valves include Parveen Industries, Oswal Industries, and Hawa Valves, with revenues ranging from 400 to 700 crore.
• ATAM is relatively new in this segment, aiming for significant growth in the next six to seven years.

Competitors in Existing Product Range:

• Rotovalve and Centro Valves are competitors in plumbing and firefighting markets.
• Rotovalve’s revenue exceeds 300 crore, while Centro Valves’ revenue is around 100 crore.

Export Security:

• ATAM Valves does not currently utilize ECGC for export security.
• Most exports are on an advanced payment basis, but ECGC may be considered as exports grow.

Impact of MSME Issues on Revenue Projection:

• Initial revenue projection of 80 crore for FY ’24 included sales of bathroom faucets, which were deferred due to focus on API valves.
• Unforeseen MSME issues emerged in late February, leading to a shortfall in revenue.
• Expectation of liquidating 70% of finished stock in Q1 to address the revenue shortfall.

Revenue Forecast for Q1 and MSME Issue Resolution:

• Forecast for Q1 revenue is approximately 7 crore, aiming to compensate for the Q4 shortfall.
• MSME issue resolution expected by the end of Q1, following recent comments from the Finance Minister indicating a potential adjustment period.

Current Order Book and FY ’25 Guidance:

• Current order book stands at 25 crore, with projects on hold due to market uncertainties.
• FY ’25 revenue target set at 70 to 75 crore.

Long-Term Revenue Growth and Market Expansion:

• Confidence in increasing revenues twentyfold over the next five years attributed to entering the API valves market for oil and refinery industries.
• Expansion plans include manufacturing larger valve sizes, aiming to capitalize on a sizable market opportunity.

Export Contribution and Cumulative CAPEX:

• Anticipation of exports contributing at least 50% to the projected 1,000 crore topline over five years.
• Cumulative CAPEX estimated at around 40 crore for machinery and equipment required for expansion.

Faucet Division Strategy and Revenue Expectations:

• Faucet foray currently on hold to focus on building a brand in the plumbing valve range.
• No expectation for the faucet division to contribute to the projected 1,000 crore topline by 2030.

Operating Margin and Profit Expectations:

• Anticipation of improving operating margins as scale of operations increases, particularly in the larger valve sizes segment.
• Expectation of increasing EBITDA and PAT with entry into the larger valve sizes market.

Business Model and Tender Business:

• Primarily engaged in direct client business and dealer network, with no involvement in tender business.
• No current plans to enter the PSU or oil marketing company markets due to regulatory approval requirements.

Timeline for Faucet Business:

• Skeptical about timeline due to API focus.
• Importing from China to understand market before manufacturing.
• Decision expected by Quarter 4, possibly to begin in the future.

In my opinion, SBI Bluechip, UTI Nifty 50 Index Fund being large cap oriented will give stability to your portfolio.

Parag Parikh Flexicap will give exposure to Developed markets. It would take care of rupee depreciation and can give good returns as INR depreciation will continue for many years.

ICICI Nifty Next 50 Index Fund may test your patience as returns may not be encouraging and Volatility will be as close to Midcap Fund. You can read review by Pattu Sir on freefincal website.

Nippon India Nifty Smallcap 250 Ind : Here your risk appetite will be truely tested. There will be huge ups and downs, so only suitable for goals which are 15 years away.

Motilal S&P 500 Index Fund : This fund will also give US exposure. With Parag Parikh Flexicap, you already have reasonable exposure to US Tech stocks, so this fund can continue till you believe it is adding value to the portfolio.

I would say, based on my experience, all Funds have good times and bad times.
Mostly the underperforming funds often catchup after few years, and Top performing funds sometimes become laggard. This cycle keep repeating after every 4-5 years, so in the long run, you should focus more on funds with good management, low expense ratio, low standard deviation (low volatility) compared to peers. This is more than sufficient.

Also you should focus more on your goals and do regular Equity: Debt balancing as your goals approach nearer.

Rest all is noise and it is less important. Once good funds are selected, stay invested until you really believe that your fund selection was wrong. That’s the key.

sir ,from which site you do graphical valuation

As I have stated earlier, the problem is not with the acquisition itself but the equity capital raise that the REIT is undertaking, which in my opinion is unnecessary, to fund this acquisition. Having said that, I’m not too optimistic about institutional investors acting to prevent this. Historically, institutional investors rarely vote against resolutions sponsored by the company’s management regardless of how shareholder unfriendly they may have been. The recent delisting of ICICI Securities is a case in point.

@Amit2saxena
Thanks for seeking my view. I am curious to see when I agree with your evaluation and financing arrangement to make it name shake distribution accretive. However, there are many moving parts, from interest rate, to lease rental to occupancy levels which can completely change the future distribution. Personally, I do not like Embassy REIT taking development risk with almost 2/3 of area being under construction. I completely agree your view that it is kind of assisting promoter group by acquiring assets at REIT level.

I would like to mention past track record of acquisition of the Embassy REIT of Tech Village in Nov Dec 2020. Even that time it was promised distribution accretive. However, there are no major improvement despite that project was almost 95%+ occupancy. Enclosing slide of presentation giving management view on same.

The actual distribution was declined first due to dilution and then due to adverse market development resulting from COVID.

Before Tech Village acquisition, distribution Rs 5.5 per unit (Sep 2020 quarter). If we apply 4% accetion, than distrubution shall increased by Re 0.22 per unit, giving approximately Rs 5.72 per unit distibution. However, Distribution never reached Rs 5.7 per unit in any quarter as revelaed from the data.

Personally, I would be happy when March 2020 distribution of Rs 6.89 per unit being crossed. While March 2020 distribution was inflated due to funding of debt by Zero coupon debentures, still almost 4 years are passed, and still Embassy REIT has not crossed it highest distribution. While definitely there were certain development like COVID resulting in lower Office space demand and SEZ tax benefit sunset to increase in interest rate, still my litmus test of successful REIT management would be when they cross their all time high distribution. Unfortunately, management seem to be more concern about growth than distribution, while I personally look as REIT as quasi fixed income assets looking forward to stable income generation.

Disclosure: Embassy REIT has second highest allocation in my fixed income portoflio after Gsec. My understanding may be incorrect. I may invest/divest from Embassy REIT without informing forum. My view may be biased due to my holding. I am not suggesting any investment action to reader. I am not SEBI registered advisor.