SIKA Interplant – An Aerodefence & Aviation Play

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.

http://www.sikaglobal.com/

https://www.aeroteksika.com/

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.

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66 Responses to SIKA Interplant – An Aerodefence & Aviation Play

  1. Gopal says:

    Wowww Ace,
    Great to see new stock story ….
    Looking at current scenario, I believe the new government will focus more & more on defence and directly or indirectly companies like sika will get benefited. This is my generic reading, I may be wrong also. What are views on my above opinion, kindly advise…

  2. sahdev says:

    this appears to be a perfect play on defense and aviation sector…..good one…

  3. parthiban subramanian says:

    Never heard of this company.. the opportunity looks promising.. I’m lost of words— how do you find these hidden companies?

  4. canromet says:

    Hi Aceji,

    A quick point on the company. The order book in quantum as of october 2018 was around 153 cr.

    Can you share the latest order book value as I’m unable to find it.

    My question however is, assuming the thesis on the opportunity size fructifies and the company gets a large amount orders/business, does the company have the bandwidth to execute on the same without leveraging too much and scaling up without an eye on the cash flows?

  5. Sb krishna says:

    Please put a glance on Tall(taneja aero) n give some thoughts. Thanks sharing the suka…

  6. Atul Prapanch says:

    Ace
    I’m a new reader. Kudos to running such a great blog. It is a great starting point for further research.
    I have one question,

    You have mentioned that the current order book consists of no offset orders & that there have been significant order wins recently. Where is this data available? as Im unable to find any order info on the bse website.

    Thank you.

  7. Raman says:

    Dear Ace investor I have the following questions

    1) Current order book value?
    2) Recently won orders by the company
    3) If order book does not contain any offset orders then what does it contain?
    4) Please provide us some insights on the order book?

    • i didnt understand…. offset orders are not technical orders but functional orders… company has orderbook in the area it functions. please read the stock story and ARs to get an idea of what the company does…. also the offset orders would come in the line of company’s work…

  8. Ketan says:

    Any view on yesterdays news on Breaking : US expected to fast track indian requests for predator UAV drones forindian army and navy

  9. Anonymous says:

    Hi sir I would like to know your views and insights, if any on the below two queries.

    1) Your views on Kernex Microsystems?

    2) On Sika, Is the total order book from MRO? since you stated that none is from offset. And isnt MRO more of an annuity based business as opposed to “order based” kind of a business? Insights on the same sir.

    Thank you for your time.

  10. Mukund Laddha says:

    Sir do u have any paid service, for cash market/long-term/short term recommendation?

    • never had …never will…. and this is not a service but just a collection of my personal thoughts… one should not take any action based on what i write on this blog….this is just for intellectual apetite. God Bless !!!

  11. Niraj Bhagtani says:

    “IDBI Bank Initiates Forensic Audit” – This is the latest update on Sankhya Infotech . Can you please let us know what this means for the company ?

    • it means that IDBI is initiating detail audit of the company’s books to check if its fine or something is cooked… this is not a positive development… now one has to wait to see what happens as per the outcome of the audit…

      • Mohit says:

        Dear Ace is this any chance of saving investment done in Sankhya or everything is lost.

        • if a stock goes up 6x and after that someone is asking this question then the the real question is if portfolio management and risk management is understood by the investor or not.. small cap investing is not for everyone and one should understand the risks associated with it and if the stock goes up multiple times and still investor is facing with this question then something somewhere is very wrong in the investor’s acumen…. if someone is unable to do portfolio management then multual funds is the right way…

  12. Niraj Bhagtani says:

    Hi Sir,

    I also wrote an email to the Comp officer at Sankhya info. This is the response to my email.

    Dear Sir,

    First I would like to thank you for writing the mail and sorry for delayed response with regard to the queries mentioned below.

    I would like to summarise that as mentioned in our results there is a withdrawal of UAE project because of which the revenues for Q4 got declined but the expenditure remained same for closing the existing projects, therefore there is a loss which the Company has incurred and also due to IDBI recall notice there was a cashflow stress as the Bank has withdrawn the restructuring package. The new projects are in pipeline and are expected to start at the earliest, so we are expecting the revenues to bounce back in Q2 and also expecting to have a favourable closure with IDBI Bank shortly.

    Thanks & Regards
    Munmun Baid

    Do you believe in what the Company Secretary is saying ? Do you think it is worth waiting in the company ? The stock has fallen significantly from where i bought it (Not disclosing the price as per the blog rules) .. Do you think the risk reward ratio is with holding now ? The market cap for the company has fallen to 46.93 CR at the current price .

  13. Naresh Mamnani says:

    any views on Anjani Portland

  14. Anonymous says:

    Ace,

    At the moment I’m unable to meet the management in person. And I do not know if I ever will be able to, until the next AGM.

    I assume that they are clean otherwise why else would someone take positions large or tracking.

    Apart from the “cleanliness” I have a few other questions on them.

    1) Is the management really passionate and hungry to grow?

    2) After meeting them did you get the inclination that these guys can scale? (there are not many businessmen who have the mentality and ability to scale a business to new orbits)

    3) Is the promoter (Kunal Sikka) surrounded by an able top management in your view?

    Of course I understand that all these must have been checked off by you as it is, otherwise you would not have/might have vested interest in the story.

    But I do not think it is wrong for us to try and know more about the company/mgmt. if interested. At such points in a company’s life cycle where there is a huge market opportunity ahead of them and they have the infrastructure to begin to capitalise on it, the bet in my view is on the management, its hunger and its ability. Hence I’m asking even though it may seem redundant. Hope you understand:)

    • i think i have already mentioned in the stock story that i am positive on the company on all counts…again that’s my own view…. one should research the company and check if their conviction is strong enough…

  15. veeru34 says:

    ace, what’s your view on state bank of india..

  16. jignesh says:

    sir, i have been holding v2 retail since you recommended…its been a big multibagger for me…. i do not wish to sell it ever…but i need the money….what should i do ?

    • the objective of investment is to make money ….but money for what….for your own need. And now if you need money then what better time to cash it… just because a stock has been a big multi-bagger is no reason for anyone to fall in love with the investment.

  17. Vishwanath Parab says:

    Prima plastic is at 75 today …Is a good time to add more

  18. manager33 says:

    sir, what’s your take on HDFC Asset management’s action today?

  19. Rohan says:

    Ace,
    Vidhi spec results are excellent for this qtr and for last 3 years they have been growing. Excellent company.
    Singer results too good and as management mentioned Home app growth to continue. Wish market sentiments were good to reflect the growth and give true valuations.

    Any thoughts?

  20. suneetha says:

    Meera Industries[ROE40%] & Ambika cotton mills[ROE15%]: Which one do you feel better? Thanks in advance!

  21. Amit says:

    Sir your views on bsl. Any change in view as stock has not able to perform as was anticipated and price has gone south considerably

    • no change from previous opinion…. i think price has almost come up 70% in this week… so if nothing changes fundamentally and price comes south….what should one do…i think we all have an answer to it…anyways…just my personal opinon…every investor’s psychometric profile is different…

  22. Anilkumar Reddy says:

    Dear Ace ji

    Sir prima plastic last quarter the sales was increased and the margins are stable and the crude rates are stable so I feel the coming qrts the margins will increased now the valuations are attractive
    As you feel My analysis is ok are not?

  23. rao says:

    Dear Ace What is your views on NESCO, SKF &PFC

  24. Satya says:

    Ace,
    Recently, Aimco pesticides has done some transactions “Disclosure Of Related Party Transactions Under Regulation 23(9) Of SEBI (LODR) Regulations 2015” what is it mean? is it benefit to the company?

    Thanks & Regards,
    Satya

  25. arnab says:

    On sika website. we are unable to find the client list of the company. Can you share a link to the same if it is not too much to ask. Thank you.

    • you can get in touch with the CS or attend the AGMs…normally defence companies are not very transparent w.r.t customer names (until and unless you do not get a single large order).. but they will disclose the biggest client in all probability. further in AGM they will freely talk about such finer details.

  26. Karan says:

    Hi Ace. Can this idea be looked at like your prima idea (in terms of excitement)? You were very excited by that idea based on how I viewed that post. I had decided to look into prima after reading your post and then I had done scuttlebut and even visited. Sold off entirely in 2017. Please note I have not bought any other idea mentioned in your blog. So I do my own due diligence before considering. Prima Plastics quite literally made my investment career as I had taken a large weight in them. I would like to thank you for blogging about them.

    I would like to know your views on the below

    1) Is there scope for re-rating in SIKA?
    2) Can SIKA grow at a high rate just on the MRO opportunity that I understand is more of annuity business?

    Thanks.

  27. prem says:

    Ace sir, Whats your view on Emmbi ind. Thank You 🙂

  28. Uday says:

    Dear Ace,

    Is bombay burmah a good buy at this valuation? And your opinion on sankhya post allotment of preferential shares to promoters?

    Thanks in advance,
    Uday

  29. J Gopal says:

    Hi , Is Cupid lost its market charm ?

  30. Amit says:

    Hi Ace, what do you say about pledged promoters holding of aimco?

    • its a debt free company, so dosent ring alarm bells but still confused.

      • Roshan says:

        It’s for working capital ..maybe they need money to fund growth now that they have grown their capacity

        • its written in their disclosure about this, but what i was confused is about the need for such huge amount. I hope the coming quarters bring some good news…although i am happy with the recent clarification about promoter holding stating there is no change in promoter holding…its certainly a positive.

  31. Prem says:

    Ace sir whats your view on “Sharat Ind”??

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