Select Company Perspectives

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.

investment thesis on racl geartech

Manufacturing from India for the world promises to be a decadal theme. We favour categories that are strategic to customers supply chains and which are more immune to dumping from China.

• Rising geopolitical tensions between the West and China have prompted MNCs to strategically reevaluate their high dependence on China and seek alternative supply chains for derisking.
• European manufacturing faces structural challenges (low-cost competitiveness, long lead times for environmental clearances).  Current macro challenges are driving higher outsourcing to players in low-cost destinations like India.
• Manufacturing may not offer as high ROCEs as IT Services/Consumer.  However, they offer 15-20% growth with longevity at 18-20% ROCE.  When growth slows down, their ROCEs could further expand as useful life of plants is greater than life over which they are depreciated. 

Investment thesis on Delhivery

We took an initial position of 3% in Delhivery, a logistics firm. 

• Logistics is an industry with decadal tail winds. We believe the sector will grow 12%+ and leaders can grow at 15%+ for long periods of time.
• Delhivery has a competitive edge and is investing to enhance the same.
• It can be 20% ROE business at scale.
• We are aligned with the thought process of the promoter / management team.
• We are paying a price that is broadly reasonable.

What does Delhivery do?

Delhivery is India’s largest fully integrated third party logistics services provider with a nationwide network covering over 18,600 pin codes.  The company provides a wide range of logistics services