Fluidomat – Revisited

Coupled with Returns

7-Apr-2012

Contents

Background

Conclusion

Risks

Valuations

Financials

Management

Industry

2

Contents

Background

Conclusion

Risks

Valuations

Financials

Management

Industry

3

Fluidomat is a leading name in the fluid couplings industry with over 4 decades of experience

Business: Fluidomat Limited (“Fluidomat”, “Company”, BSE Code: 522017) is an ISO 9001:2008 certified company that manufactures a wide range of Fluid Couplings

Founded: 1971

Headquarters: Dewas, Madhya Pradesh

Products: Fluid Couplings are used in variety of applications including conveyors, fans, pumps, crushers, grinders, pulverizers, ball mills, wire stranding, paper machinery, cement machinery, digesters, churners, mixers, beaters, centrifuges, oil extraction machines and mining machines. A detailed list of their products is available here

Key end use industries: Steel, Power, Cement, Paper, Chemical, Fertilizer, and Ports

Employees: The Company has about 170 employees who have worked for several years with the Company

Manufacturing facilities: The Company’s factory at Dewas near Indore is equipped with sophisticated manufacturing, R&D, quality control and testing facilities to ensure quality and consistency required for producing intricate Fluid Couplings. The facility has an installed capacity of 1500 fluid coupling units

Website: www.fluidomat.com

4

Sources: Company annual reports and website

Contents

Background

Conclusion

Risks

Valuations

Financials

Management

Industry

5

The Company has strong relationships across diverse sectors reducing exposure to recession and negative black swan events

6 Sources: Company annual reports and website

Plant and Machinery : BHEL, Elcon, Mcnally Bharat, BGR Energy, Indure, Sayaji Iron & Engg, TRF, Thyssenkrupp Industry, ISGEC, L&T, Tecpro, AE Automation, Tecgates, HOWE

Power Plants: BALCO, Bhushan Power & Steel, MSEB, NTPC, PSEB, HPGCL, GIPCL, TNEB

Cement: ACC, Manikgarh, Binani, Jaypee, JK, Kuwait Cement, Ultratech, Shree Cement, Sanghi Industry

Coal Mining: Eastern, Mahanadi, Northern, South Eastern and Western Coalfields Fertilizers and Chemical Plants: Fertiliser and Chemical Travancore, GHCL, Grasim,

GSFC, IFFCO, Nirma, Paradeep Phosphates, Goodlas Nerolac, Heubach Colours, Indogulf Fertilizers

Paper and Pulp: Phoneix Paper and Pulp, Orient Paper, Tamil Nadu News Print and Paper, Hind Paper, Century Paper and Pulp

Steel: Bhushan Power and Steel, Essar Steel, SAIL, Neelanchal Ispat, Jindal Steel and Power, PT Ispat Indo

Metals: BALCO, Hindustan Zinc, NALCO Port Trusts: Mormugao Port Trust, Paradeep Port Trust, Adani Port Trust,

Vishakapatnam Port Trust, Madras Port Trust

Contents

Background

Conclusion

Risks

Valuations

Financials

Management

Industry

7

Fluidomat was founded by Ashok Jain and is currently managed by the Jain family

The Management of the Company is led by Ashok Jain, Chairman and MD, who is an

electrical engineer by education

Ashok Jain founded the firm in 1971 and has been associated with pioneering the

technology development in the field of Fluid Couplings

K C Jain, Chief Executive

A K Sinha, Director

Kunal Jain, Executive Director

Pramod Jain, Deputy Vice President and Compliance Officer

8

Sources: Company annual reports and website, BSE

The consistent increase in promoter shareholding indicates their confidence in the Company and is a positive sign for the shareholders

Shareholder Dec-2010 Mar-2011 Jun-2011 Sep-2011 Dec-2011

Promoters 46.69% 47.20% 48.04% 48.75% 49.45%

Public 53.31% 52.80% 51.96% 51.25% 50.55%

9

0

5

10

15

20

25

0

50,000

1,00,000

1,50,000

2,00,000

2,50,000

% s

har

eho

ldin

g p

ost

pu

rch

ase

Shar

es p

urc

has

ed

Shares purchased % Shareholding post purchase

Insider buying (Kunal Jain; Apr-2009 to Jul-2010)

Sources: BSE

Contents

Background

Conclusion

Risks

Valuations

Financials

Management

Industry

10

In the past five years, Fluidomat has grown profits at a CAGR of 23% led by growth in sales at 18% CAGR and margin expansion by 1.6%

11

12.0 14.3

16.0 18.6

22.9

1.0 1.2 1.4 1.9 2.3

8.5% 8.3% 8.8%

10.3% 10.1%

0%

2%

4%

6%

8%

10%

12%

0

5

10

15

20

25

FY2007 FY2008 FY2009 FY2010 FY2011

PAT

Mar

gin

(%

)

Rev

en

ue

s, P

AT

(IN

R c

rore

s)

Revenues PAT PAT %

Fluidomat – Revenues, Profits and Profit Margins (FY2007 to FY2011)

17.6% 22.7% CAGR (FY07-11) Sources: BSE

A reduction in SG&A, Interest and Depreciation expenses as % of Revenues, along with Revenue growth created value despite increase in other Manufacturing expenses

12

Fluidomat – Summary P&L (FY2007 to FY2011)

Sources: BSE

FY2007 FY2008 FY2009 FY2010 FY2011 Revenue 12.0 14.3 16.0 18.6 22.9

growth % 19.2% 12.1% 16.4% 22.9%

Expenditure

Manufacturing 6.7 7.9 9.1 10.7 13.7

margin % 55.8% 55.6% 56.7% 57.6% 59.7%

Employee Cost 1.7 2.1 2.6 3.2 4.0

margin % 14.5% 14.9% 16.3% 17.2% 17.3%

Selling & Admin 1.4 1.6 1.5 1.2 1.2

margin % 11.3% 11.4% 9.1% 6.2% 5.2%

Misc 0.1 0.1 0.1 0.1 0.1

margin % 0.4% 0.4% 0.4% 0.3% 0.5%

EBITDA 2.2 2.5 2.8 3.5 4.0

margin % 18.1% 17.7% 17.6% 18.6% 17.3%

Interest 0.5 0.3 0.3 0.2 0.2

margin % 4.0% 2.4% 1.9% 1.0% 0.7%

PBDT 1.7 2.2 2.5 3.3 3.8

D&A 0.3 0.3 0.3 0.3 0.4

margin % 2.6% 2.2% 1.9% 1.8% 1.6%

PBT 1.4 1.9 2.2 2.9 3.4

Tax 0.4 0.7 0.8 1.0 1.1

Tax rate % 25.5% 36.7% 36.7% 34.7% 32.8%

PAT 1.0 1.2 1.4 1.9 2.3

PAT margin % 8.5% 8.3% 8.8% 10.3% 10.1%

Average sales price for fluid couplings has gone up by ~40% in the past couple of years; volume sold was ~125% installed capacity in FY09/11

13 Sources: BSE

1,305 1,490

1,760 1,469

1,764

9.3 10.5 12.2 15.0 17.3

72 70 69

102 98

0

20

40

60

80

100

120

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

FY2007 FY2008 FY2009 FY2010 FY2011

Ave

rage

Sal

es

Pri

ce

(IN

R ‘0

00

)

Vo

lum

e a

nd

Val

ue

of

Fl

uid

Co

up

lings

So

ld

Volume Value (INR crores) Average Sales Price (INR '000)

Fluidomat – Units of Fluid Couplings Sold (FY2007 to FY2011)

While the consumption of Aluminum increased by 33% in the past 5 years, the average cost price has decreased (~20% till FY2010; ~7% till FY2011)

14 Sources: BSE

80 92 94 99

107

10.7 11.1 11.2 10.7 13.3

133

121 119

107

124

0

20

40

60

80

100

120

140

0

20

40

60

80

100

120

FY2007 FY2008 FY2009 FY2010 FY2011

Ave

rage

Co

st P

rice

(

INR

‘00

0)

Alu

min

um

Co

nsu

me

d

(Vo

lum

e a

nd

Val

ue

)

Volume (Million Grams) Cost (INR million) Average Cost Price (INR/KG)

Fluidomat – Raw Material Consumed (FY2007 to FY2011)

Raw material costs have more than doubled in five years, led by costs of Boughout Components; Aluminum costs’ contribute ~15% vs. ~25% earlier; ~98% raw material is local

15 Note: Raw material costs include Aluminum, other and boughtout components; further, raw material is either imported or sourced locally Sources: BSE

4.1 4.9

6.1

7.3

9.0 2.5%

2.3%

0.5% 0.3%

2.3%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

0

2

4

6

8

10

FY2007 FY2008 FY2009 FY2010 FY2011 imp

ort

ed

mat

eri

al c

on

sum

ed

as

%

of

Raw

Mat

eri

al C

ost

s

Raw

Mat

eri

al C

ost

s (I

NR

cro

res)

Raw Material Costs (INR crores) Value of imported material consumed as % of raw material costs

Fluidomat – Raw Material Costs* (FY2007 to FY2011)

25.8% 22.8% 18.5% 14.5% 14.8%

36.2% 40.7% 44.2% 37.1% 38.3%

38.0% 36.5% 37.3% 48.4% 46.9%

0%

20%

40%

60%

80%

100%

FY2007 FY2008 FY2009 FY2010 FY2011Raw

Mat

eri

al C

ost

s C

om

po

ne

nts

Aluminum Other Boughout Components

In the past five quarters, Fluidomat’s profits have grown led by margin expansion (~14%*) and sales growth (38%*)

16

4.2

6.8

5.4

6.9 5.8

0.5 0.7 0.6 0.9 0.8

11.5%

9.7%

11.9% 12.3%

13.9%

0%

2%

4%

6%

8%

10%

12%

14%

16%

0

1

2

3

4

5

6

7

8

Q3FY2011 Q4FY2011 Q1FY2012 Q2FY2012 Q3FY2012

PAT

Mar

gin

(%

)

Rev

en

ue

s, P

AT

(IN

R c

rore

s)

Revenues PAT PAT %

Fluidomat – Revenues, Profits and Profit Margins (Q3FY2011 to Q3FY2012)

Note: 14% is the PAT margin for Q3FY2012 which is significantly higher than the PAT margin for the past five years; sales growth is y-o-y growth for Q3FY2012 Sources: BSE

Fluidomat has almost become debt free led by efficient capital allocation as indicated by high ROCE and ROE

17

21

28

31 33

35

20 23 23

25 24

92%

49%

28%

18%

7% 0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0

5

10

15

20

25

30

35

40

FY2007 FY2008 FY2009 FY2010 FY2011

De

bt

to E

qu

ity

RO

CE,

RO

E (%

)

ROCE ROE D/E

Fluidomat – ROCE, ROE and D/E (FY2007 to FY2011)

Sources: Company annual reports and website

Fludiomat has continued to generate positive free cash flows and has significantly improved its cash position

18

1.7 1.6 1.7 2.1 2.0

-0.2 -0.3

-1.0

-0.2 -0.6

-1.3 -1.4

-0.4 -0.5

-1.6

0.2 0.3

0.5

1.9

1.8

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

FY2007 FY2008 FY2009 FY2010 FY2011

Cas

h a

nd

Eq

uiv

ale

nts

(IN

R c

rore

s)

Cas

h F

low

s (I

NR

Cro

res)

Operating Cash Flows Investing Cash Flows

Financing Cash Flows Cash and Equivalents at Year End

Fluidomat – Cashflows (FY2007 to FY2011)

Sources: Company annual reports and website

Contents

Background

Conclusion

Risks

Valuations

Financials

Management

Industry

19

Fluidomat is a debt free company trading at ~5x P/E and 4% dividend yield indicating a potentially attractive investment opportunity

CMP: 25, Shares O/S: 49,27,000

Market Cap: INR 12.3 crores

Debt: ~0

Cash and Equivalents: INR 1.8 crores

Enterprise Value: INR 10.5 crores

Book Value: INR 20.9

P/E: 5.3

P/B: 1.2

MCAP to Sales: 0.6

Dividend Yield: 4.0%

Average Daily Traded Volume: 2,280

52w Hi: 53.7 (5-Nov-2010)

52w Lo: 22.0 (24-Feb-2011)

20

Sources: BSE, Company annual reports

We published a research report on Fluidomat for the first time in Aug-2011, and subsequently in Sep-2011 with minor changes. Since then, the stock has gone up ~40%. For latest data, please refer to the next page

The investment opportunity in Fluidomat at 20s was a classic example of special situations

21

Sources: BSE, Company annual reports

0

5

10

15

20

25

30

35

40

45

50

55

Aug-2002 Aug-2003 Aug-2004 Aug-2005 Aug-2006 Aug-2007 Aug-2008 Aug-2009 Aug-2010 Aug-2011

Fluidomat – Share Price Movement (Aug 2002 – Apr 2012)

We published a research report on Fluidomat for the first time in Aug-2011, and subsequently in Sep-2011 with minor changes. Since then, the stock has gone up ~40%. For latest data, please refer to the next page

Fluidomat is a debt free company trading at ~6x P/E and 3% dividend yield indicating a potentially attractive investment opportunity

CMP: 34.9, Shares O/S: 49,27,000

Market Cap: INR 17.2 crores

Debt: ~0

Cash and Equivalents: INR 1.8 crores

Enterprise Value: INR 15.4 crores

Book Value: INR 20.9

P/E: 5.8

P/B: 1.7

MCAP to LTM Sales: 0.7

Dividend Yield: 2.9%

Average Daily Traded Volume: 2,873 (6-Apr-2011 to 4-Apr-2012)

Average Daily Traded Value: INR 84,327

52w Hi: 41 (16-Mar-2012)

52w Lo: 23.5 (2-Aug-2011)

22

Note: Share price and other data per the latest data available as of 7-Apr-2012 Sources: BSE, Company annual reports

Contents

Background

Conclusion

Risks

Valuations

Financials

Management

Industry

23

However, there are some risks and uncertainties associated with an investment in Fluidomat

Uncertainty in demand for Fluid Couplings: Fluidomat’s products are used in a variety of sectors; as such, its performance is not dependent on any particular sector. However, it is important their clients continue to grow and there is a demand for fluid couplings, a major source of revenue for the Company. Any fluctuations in number and price of fluid couplings would impact sales/profits

Fluctuation in raw material costs (Aluminum, boughtout components, others)

Fluidomat is a microcap, and as such, bears the investment risks associated with a microcap (illiquid, limited public information, etc.)

Location risks (including labor strikes, regulatory changes, transportation problems, etc.), given their manufacturing operations are focused in Madhya Pradesh

Any other negative black swan events

24

Contents

Background

Conclusion

Risks

Valuations

Financials

Management

Industry

25

Fluidomat appears attractive for a long term investment with low risk

Sector Leader: Fluidomat is a leader in Fluid Couplings; it is not surprising that Fluidomat appears second only to Wikipedia on a Google search for Fluid Couplings

Large and Diverse Clients: The Company has strong relationships with almost all the key players in diverse sectors. As such, it is fairly protected for general economic and client risks

Strong Financials: Growing fairly well in terms of topline and margins. Almost debt free with RoE/RoCE upwards of 20% on a consistent basis

Attractive Valuations: The stock is cheap at less than 6x P/E Insider Buying: The promoters have increased their stake in the Company to

49.45%. Recently, the shares pledged by the Promoters to IFCI were revoked, a breather to those concerned

Dividends Coming: The Company’s Board recently recommended a dividend of 1 Rs / share (3% yield at CMP), which is mouth-watering, considering this is the first time in the long history of the Company that a dividend has been announced

Early Mover Advantage: As of today, there are no other reports about this Company which will give us the advantage of getting early and making multibagger returns aka MultiReturns. This is “Something better than Perfect”

26