I have been searching for quality mid and small-cap companies which can be good proxy plays in the Capital Goods space. The motivation to do this comes from the fact that the entire core sector is going through troubles. Leave aside investments picking up, consumption which has always been the inherent strength of the Indian economy is entering the zone of jeopardy. Well, this is the time when one should hunt for bargains, right? Here
we go discussing one such fundamentally strong investment idea: Disa India Ltd.
Background: Disa India is an equipment manufacturer with advanced foundry and surface preparation process technology. The company supplies complete foundry systems by integrating the international DISA range of molding machines and sand mixers with proper combination of sand plant equipment, surface preparation machines and environmental control systems. The company (DISA India Ltd) is a fully owned subsidiary of Denmark based Noricon group.
The company mainly caters to ferrous casting industries, which are used in heavy commercial vehicles and tractors, by providing complete foundry machines and solutions. Wheelabrator division provides shot blasting machines for surface cleaning of castings produced at a foundry.
About Noricon group: Noricon group was established in 2009. The group has four proprietary technologies in the equipment space:
DISA: Metal casting and molding equipment
Italpresse Gauss: Die casting machines
Striko Westofen: Furnace technology
Wheelabrator: Shot blasting machine (used in the forging industry for cleaning metal surface)
Noricon group has a presence in all major continents representing either of the above four technologies. In India, the company has four sales offices in New Delhi, Pune, Bangalore & Kolkata, and two manufacturing plants in Karnataka. The group is relatively new and started operations in the year 2009.
Cash position: The company has cash-in-hand of Rs. 97.85 crores as on 31st Mar 2019. The total size of the company's balance sheet is Rs. 294.85 crores. Cash is approximately 33 percent of the total balance sheet. Market capitalization for the company is Rs. 684 crores. Taking cash as a ratio of market cap, the number comes to approximately 14%.
Return ratios: The company has a successful track record of generating above-average returns when compared with the industry. While the Return on Equity has been falling over a period of time, this accompanied by an increase in reserves. The company is not a high dividend-paying company as is evident from the dividend payout ratio. Sales growth for the company has been significant enough for investors to be happy even with the lower dividend payout ratio.
Return on Equity: The average Return on Equity for the last 10 years is 23% for the company
Return on Capital Employed: The average Return on Capital Employed for the last 10 years is 37%.
Debt: The company has zero long-term or short-term liabilities as on 31st March 2019.
Topline growth: Average growth in the top line over the last 10 years stands at 16% with the company registering a 23% growth rate for the FY ending March 2019
EBITDA margins: EBITDA margins stood at 14.48% for the year ending March 2019. EBITDA margins for the company fluctuate in the range of 8% to 20% (Observation based on the data for the last 10 years)
PAT margins: Average PAT margins stood at 11% for the last 10 years, with margins at 11.48% for the latest financial year.
Inventories: Inventories have been rising consistently. This is in line with the overall market trend of rising inventories in the core sector. As of March 2019, inventories stand at Rs. 64.27 crores. This is approximately 28% of the total balance sheet.
10-year analysis: In the last 10 years, the cumulative Operating Cashflows to cumulative PAT ratio stands at 0.81. This means the company has been able to convert 81% of its profits into cashflows. In the future, this ratio needs to be watched carefully as an increase in receivable will naturally get this ratio down over a period of time.
Valuation: The Price to Earnings ratio as of today stands at 21.33. Below is the chart for the historical price to earnings ratio. The relative valuation as per the historical PE ratios is comfortable.
Price to Earnings ratio chart for Disa India
Board of Directors profile: I have done a preliminary check about the board of directors. In my opinion, the structure of the board is well diversified. Board members are professionals from various fields and there is no case of concentration on the BoD from the same family.
Sectoral tailwinds:
Tailwinds are important when analyzing a company from an investment perspective. Disa India is expected to be a beneficiary of the scrappage policy implementation and BS VI regime.
India has close to 4000 foundries, out of which very few are automated. The foundry industry is facing a crunch of skilled manpower. DIL offers products in the foundry automation space
Risks to the call:
The company is a vendor to clients in the core sector of the economy. In the recent past, India's industrial production has been on a downward trajectory. A sustained downward movement in the economic output will affect Disa India's performance.
The company does not pay handsome dividends. A slowdown in sales growth is likely to upset investors who would then demand a higher dividend payout.
Inventory has been piling up, however, this is an overall phenomenon in almost all sectors.
I tried searching the internet for the history of Noricon group, however, I couldn't find much. In case you like the fundamentals of this company and are thinking of investing in the same, do read more about the parent company.