Company: A good investment is one that has certain niche and entry barriers to their business and is on cusp of business or sector tailwinds and more importantly, is managed by clean and honest management. One such company is Sika Interplant Systems Ltd. Sika garners majority of its revenues from Aerospace & Defence (A&D) and Aviation sectors along with marginal contribution from the automotive sector. The company is mainly into Engineering Design, development and integration along with maintenance, repair and overhaul (MRO) services. Sika is also one of the very few private companies that have design approval from the Center for Military Airwothiness and Certification (CEMILAC). A number of international OEMs have significant offset obligations outstanding, and so it is expected that the opportunity from offsets in the coming years will be significant, with avenues likely to be available both in manufacturing and services. With the estimated 100 billion USD worth of defense purchase around the corner, there’s a huge opportunity in the offset .
We all know that India is getting huge number of civil planes but most interestingly, for service (which is second largest cost component after fuel for Airlines) almost all the planes have to go to neighboring ASEAN countries for the lack of facilities in india and this adds significant maintenance costs to the plane and the sector overall. With an expected growth in fleet size of Indian carriers to over 1700 aircraft in the next 20 years, the Indian Maintenance, Repair and Overhaul(MRO) market is pegged at an estimated value of USD 5.2 bn by 2026.At the same time, as the fleet ages, the requirements for advanced checks will continuously increase. This therefore is a great business opportunity – if you can get through the significant entry barrier, which is the licensing requirement. Given its scope and strategic fit to its existing aerodefence business Sika got a JV with Aerotek UK. Aerotek Sika (JV) is dealing in maintenance, repair and overhaul of landing gear and related assemblies, aviation hydraulics, engineering repair of wheels, cadmium plating and spares supply. Given this governments’s serious thrust on civil aviation, this in itself presents a very lucrative opportunity.
For Sika’s defense business, a notable structural change happened last year, when one their largest customer – HAL came out with its IPO. Their projects are now getting scrutiny of investors (like BEL and BEML) and their time bound completion is now in focus, which in-turn would ensure sustained and time bound revenues for Sika. Last couple of order wins could be part of this structural change. Another important change is their scale up in the design services which can completely change the trajectory of the OPM. I must add the metamorphosis of SIKA started when the young blood (the present CFO and second generation of founder) joined the company a few years back after completing his stint at the Goldman Sachs. He brought in the required financial discipline, built capability and laid foundation for futuristic work, as a result of which today SIKA is sitting on its highest ever order book and is probably one of the very few growing debt free private defense companies. By the way as a side-note, as far as i understand, the components they manufacture can be used to make missiles too BUT whether they go on that route or not is not known – but this could be a joker in the pack.
Valuations: Sika interplant is available at juicy valuations. At the current market cap of around 75cr the stock trades at just 17PE (trailing 4 quarter)and is almost debt free ,with a very strong interest coverage ratio. There are hardly any debt free growing defense companies around and mostly all defense companies are trading at 30-70 PEs. The company has land which is valued at almost half the market cap alone. The promoter holding is high at more than 71%. Given we have great earning expansion coming through the valuations are becoming even more attractive.
Technicals: The stock is in great long term shape. After taking out its all time highs last year, it gave a retracement to the breakout point and has now started to move up again. With medium term moving average crossovers happening the price is indicating that now a sustained uptrend is in place.
Sika Interplant is now sitting on its highest ever order book which roughly gives us three years visibility and the good part is nothing of it is from offset. In the coming years once they start getting offset contracts, the revenues could go to altogether another trajectory. The recent order wins is significant in more ways than one. Not only they have given a long term revenue visibility but it also signifies how customers perceive Sika’s execution capabilities. For an apparently small company these orders are really large and thus makes us believe that customers have a lot of faith in Sika’s execution capabilities.
God Bless !!!
Disclaimer: It is safe to assume that I have some vested interests in the stock. Also, the above stock story is my personal view in individual capacity and I am not a SEBI Registered Research Analyst. For rest, please look at the About page.