Select Company Perspectives

INVESTMENT THESIS ON Yasho Industries Limited

In this note we explain why Yasho’s elevated Debt at present is a considered risk and why we retain faith on a company that is executing well amidst a challenging environment.

~23% of Yasho Revenue comes from the US.  It has faced a tariff shock as customers have delayed orders.  This happened at a time when Yasho just finished a very large Capacity expansion which resulted in high Balance Sheet leverage (a conscious choice, as we explain below).  The tariff shock has delayed the plant ramp-up.  The delay, keeping in mind high leverage, has perhaps alarmed investors, some of whom have dumped the stock, which has corrected ~35% in the last six months.

Why do we have a portfolio position with very high leverage?

Debt creates fragility and we prefer no Debt or low Debt companies.  However, often, low Debt companies are also those who may not be able to grow 20%+.   We are willing to make exceptions in select cases where:

• The upside can be Asymmetric (rather than linear). In an earlier blog we explained what a company with an Asymmetric upside can do to a portfolio’s overall return.  Read here.
• Premature Equity dilution is not in long-term equity shareholders’ interests, including ours.
• We trust promoter judgement when it is backed by a strong execution track record and customer credibility.
• We believe default on Debt repayments is a low probability event.
• There is no promoter Equity pledge which can create a death spiral.

Finally, we manage the risk of high Debt positions by position sizing at an aggregate portfolio level. ~65% of our non-Financial Services portfolio carries Nil or marginal Debt

Investment Thesis on Axtel Industries

Summary views

• We believe Axtel can grow bottom-line at ~13-20% over long periods of time (serving the food industry which is early in growth life cycle, from market share gains, Exports and Operating leverage), while converting 75% of PAT to FCF.
• Axtel is a high-quality business as it can grow at healthy rates while generating strong FCF (ROCE is ~60%+) given unique engineering edge, strong competitive position, and an Asset light business model.
• Current valuations basis our entry price¹ are reasonable (~25x core FCF implies ~4% FCF yield) which offers a roadmap to ~15-20%+ IRR with reasonable growth assumptions.
  • 15% IRR hypothesis assumes ~13% FCF growth, 4% yield and some de rating to ~22x FCF if Earnings cyclicality isn’t fixed.
  • 20%+ IRR assumes ~15% FCF growth, 4% yield and valuation re rating to 28-30x FCF if cyclicality is reduced through further diversification. There is additional upside if the excess cash is used for any strategic investment or extension into adjacencies.
• Axtel remains an undiscovered Microcap story with no institutional shareholders or research coverage. If the Axtel management team communicates with the market and more players understand the story, we expect interest in the stock and valuation multiples to increase.

Investment Thesis on Sansera Engineering

We invest with an ownership mindset, seeking companies that can compound Earnings at 15%+ CAGR for long periods with 18%+ core steady state ROE and modest leverage.

That would require a

1. large and growing market opportunity.
2. Identifiable competitive edge vs peers.
3. A management team with the courage to make investments that may pay off in the long term, even if it impacts ROCE in the short term.
4. Paying valuations that are broadly reasonable in the context of the longevity of growth, moat and steady state ROCE of the business. 

We believe Sansera has all the above ingredients.

Investment Thesis on Pix Transmissions Limited

Summary

We believe opportunity exists for Pix to compound earnings at ~15%+ this decade. 

In a very over-valued market, our entry points over the last 2 years have been in the range of 17-20x TTM PAT.  We believe entry priced paid are reasonable for a business with a long growth runway, leadership of a niche in India, and a high pre-tax ROIC¹ of 26-32%. 

Pix is still sub-scale in exports but should reach critical scale in 2-3 years, which will add more stability and a kicker to earnings.  With more predictable ~15% earnings growth and >25% ROIC profile, valuation multiples could expand to ~25x.  Pix offers good upside/downside prospects, especially in a very over valued market where value is hard to find.

Industrial consumables are good businesses to own.

Investment Thesis of our Top 15 Positions held under the PRUDENCE Scheme

Please click here if you would like to read the investment thesis, financials and valuations of the Top 15 positions under the Prudence scheme

Investment in Shivalik Bimetal Controls Ltd

Summary views

• Shivalik Bimetal offers possibilities of 15-20%+ Sales CAGR and 17-20%+ PAT CAGR over long periods.  We see structural tailwinds of end market growth, potential for market share gains globally and forward integration into value-added products. Margins should expand from forward & backward integration and operating leverage.
• The Ghumman family now has full control over the company with larger shareholding having recently bought stake from the other promoter group at 610 per share¹. A single promoter group can drive more decisive decision making and we are already seeing more investments behind Sales and R&D.
• Business is resilient & derisked and should generate meaningful Free Cash Flow over next few years despite Cap ex due to high steady state post tax ROIC of 30-35%+ due to the wide Technology moat.
• Recent share price correction (~35% decline from peak) can be explained by short-term growth challenges and market corrections. We remain optimistic long term and have used the correction to increase our position size to ~4% as we find current valuations attractive. Any further decline will be an opportunity to add more to our positions.
• Shivalik is a Phase 3 co poised to become Phase 4. We have explained our framework in our last blog.

What do they do?

Investment thesis on indiamart

IndiaMART share price declined ~17% post Q2 FY25 results.

In this note we explain potential reasons for this steep correction and why we have used this opportunity to add to our positions.

Summary message

• Despite healthy profit and cash flow growth, the sell-off in IndiaMART was driven by continuing lack of momentum in addition of paid suppliers and muted customer collections in Q2 FY25.  The market perhaps believes IndiaMART is at a mature stage on its growth life cycle.
• We believe IndiaMART is still early in growth life cycle with significant room both for user growth and ability to monetize its platform (higher FCF¹ via upsell, cross-sell and margin expansion. 
• At 20x FCF TTM for its core listings business, valuations are very attractive even if the business is mature stage of life cycle.  These valuations imply 7% FCF growth to perpetuity² which is significantly lower than what we believe is possible.  There are few businesses in India with the ROE profile and moat of IndiaMART. 
• We have used the steep price decline to increase our position size to 7%.

investment in shivalik bimetal controls ltd

Shivalik’s core competency is high precision metal welding used to make specialized products like Shunt Resistors, Thermostatic Bimetals and Electrical Contacts (explained below).

Shivalik can grow topline at 15-20%+ CAGR for long periods benefitting from multiple secular domestic and global tailwinds (growth in Domestic Smart Meters/ Electric Vehicles/Hybrid and global customers derisking supply chains).   They have a dominant position in India and can become meaningful global players in their niches over time as customers derisk supply chains.