We know that last five years have been like a plague for Indian Economy for reasons more than one, but as they say, tough times never last but tough people do. Therefore, if there’s a dividend paying company that has grown at a CAGR of more than 25% in both topline and bottomline during these five years in stark contrast to its peers who have mostly de-grown and the largest peer (Sundram Fasteners considered a bluechip by many) has hardly managed a single digit CAGR we take notice, but what if I tell you that inspite of being in a relatively capital intensive industry, this manufacturing company has recorded an average 5 year RoCE of around 25% and average five year RoE at more than 23% then we take serious note of this…and if I tell you that out of these 5 yrs one year has been of de-growth for the industry then its achievements become even more glaring (yes I agree, the success in light of challenges faced reminds us of Freshtrop Fruits). But the opportunity becomes even more attractive when you know that this gem is available at around seven times FY 15 EPS whereas the so called bluechip is trading at around 22 times FY15 EPS.
Background: Simmonds Marshall’s main business is industrial fasteners used in auto and engineering industry. Simmonds was incorporated as a Private Limited Company in technical and financial collaboration with Firth Cleveland Fastenings Ltd., U.K. holding 51% of the equity of the company. This shareholding was diluted progressively and the balance of foreign holding was purchased fully by the current promoters in 1987. The company’s promoters are one of the most reputed and financially strong business houses of pune. The company supplies a range of Specialised Nylon Insert Self Locking Nuts and other Special Fasteners to all the two-wheeler manufacturers in the country and almost all major four-wheeler manufacturers in the country. The company does not focus too much on the CV segment as of now. The company had started focussing on exports some time back and the results have been very encouraging. Now the company plans a major thrust on exports which also gives natural hedge to the company, along with much better margins. The company has also been successful in acquiring new customers and also getting bigger orders from existing clients by wresting away orders from its bigger peers.
Valuation: This dividend paying company is currently trading at just 7 times forward PE, whereas others like sundram fasteners are trading at 22 times forward PE (also simmonds is trading at just 0.65 times its FY14 sales as opposed to Sundram that is trading at around 4 times FY 14 sales). The company, in the first two quarters has given a net profit of almost entire last year. The first quarter net income was severely affected by deferred tax which was again a one time hit (inspite of this the company has given almost entire last year’s profits in first two quarters itself) and therefore, the second quarter was excellent both on operating income as well as net income and the same is expected for third and fourth quarter as well .Given a very strong order book, no capex for next couple of years (its working at a 55% utilization as of now) and declining debt, Simmonds is expected to grow its topline at a 30% CAGR and bottomline at 35% CAGR for next two years..
Considering how well they have grown in last five years when the economic down cycle was going on and especially when one of those years was a year of de-growth for the industry it operates in and considering the tremendous growth anticipated for the industry, this small cap has all the ingredients of becoming a big multi-bagger and is a must have for anyone interested in having an auto-components story in his/her portfolio. In today’s time when there’s hardly any value left in the markets plus given the massive valuation gap between Simmonds and its larger peer and given the much higher growth coming for Simmonds, the time is ripe for Simmond’s massive re-rating.
Technicals: The stock has broken out after almost 5 yrs of consolidation and given two successive weekly closes above its breakout point of 59.5 rs. The stock is looking rock solid and given the strong earnings growth and PE re-rating, the stock can go up multi-fold in times to come.
Note: I have always been very cautious of this sector and therefore, I tried to be very sure of the company that I select in this sector. Hence, when the first quarter results were announced and the company told me that the deffered tax effect would not recur, i wanted to wait for another quarter to see if company indeeds delivers on what it promises (and yes it did) and given that it has concided with a multi-year breakout and with my subsequent second round of interaction with the company, my confidence has increased multi-fold. I believe the sector is poised for major growth in years to come and therefore, if we are in the right company, the gains would be substantial. The management’s body language is extremely confident and optimistic and given their proven capital allocation skills, I believe we might have just another winner on our hands.
God Bless !!!