Rapicut Carbides

1)      Rapicut Carbides is promoted by a group of experienced technocrats and is into the production of tungsten carbide products . Rapicut Carbides stands for "Rapid Cutting Carbides”. Its products include metal cutting tips, special and formed tips, wire drawing dies and wear parts. For the mining sector, it manufactures tungsten carbide drill steel inserts, coal auger and integrated drill steel rods. Its products find application in the automobile, mining, rock drilling, oil exploration and general engineering industries. RCL is diversifying its product-mix by adding other powder metallurgical products, like indexable inserts and more value added products. It will also manufacture extrusion rods, coupling sleeves, adaptors and cross bits mainly used in underground tunneling work. For the ball bearing and fastener industry, it will manufacture cold heading dies

2)    ROCE 3yr avg: 34.83%             Return on equity: 23.88%             Return on assets 3years: 37.32%

        The company has increased its sales from 10 to 40Crs in 10 years(cagr in sales of 17%).The company also increased its profits at 17% cagr for the last 10 years.The company had a net operating margin of 15-16%.

        This year the company faced two challenges. First, the mining sector from which majority of its revenues come from didn’t do well. Secondly, the main raw material tungsten is imported. Last year tungsten prices were at higher levels. This along with the rupee depreciation affected the operating margins. The company could do an OPM of only 12% last year

3)      75% of the revenues come from mining sector & its largest customer is Neyveli Lignite Ltd. which accounts for around 15% of the turnover. RCL’s customer base comprises companies including SAIL, TATA Steel, BHEL, Neyveli Lignite, Mineral Exploration Corporation, etc. Around 35% - 40% of sales are coming from PSU's. (The expected outperformance of PSUs under NDA govt could be a positive). The remaining 1/4th sales come from the Industrial Sector. 

4)      According to the management, there are only 4 cos. which are manufacturing Tungsten products in India.

       Sandvik - http://www.sandvik.com/en/

WIDIA - http://www.widia.com/widia/en/products_main.jhtml

        Electronica - http://www.electronicagroup.com/

Rapicut Carbides - http://www.rapicutcarbides.com/

Sandvik & WIDIA are MNC's. These cos. make tungsten tools & equipment whereas Rapicut only manufacturers consumables. So they don’t cause much competition to Rapicut and we can easily say that the company is operating in a niche area

5)      The comapny manufactures consumables for Coal, Granite and O&G sectors. These consumables have a short life span & after certain hours of usage, they need to be replaced. So the company’s product are in market demand like a consumer durable. The Import Duty on the products that Rapicut manufactures is 12.5%. So I dont perceive any threat from Chinese imports.

6)      The company has a good dividend payout ratio of over 20%and offers a dividend yield of 4%. The company has been a consistent dividend payer for the past 6 years and has continuously been raising the dividend paid

  

7)      The company is undergoing a CAPEX plan of 5 year (FY12-17) worth 5.5Cr. (75% is a term loan from SBI @ 12.5% floating and rest through internal accruals). This is the result why the interest expenses has increased 

8)      The company's registered office & factory property in Ankleshwar measures 3000 sq. meter (4 acres) and has a market value of approx. Rs.3 crs

9)      One of the promoters Chetan G. Cholera has bought 50000 shares of the company through open market purchase in the month of May. This shows the confidence of the promoter in the company’s potential

10)  The company has a low equity base of 5.37 cr that too after giving bonus 3:2 last year.This was the only instance of equity dilution in the past 10 years

This small cap company that consistently grew faced a temporary sluggishness. Even when the user industry was doing very badly, the company could maintain its sales. The fortunes of this company are tied up to the domestic mining sector & once the mining activities come back to full swing, the company will be back into its glory days.

 The tungsten(company imports 50% and rest sourced from local scrap dealers)  prices that were ruling high last year has started cooling. The rupee is also stabilizing. This would help the company improve its operating margins. At the current price of 38 rs, the EV of the company is below 25 crs and market cap is just 20 crs. That makes this company a good bet on India’s Industrial Sector Growth

Pitti Laminations

·         Pitti Laminations Limited is a manufacturer of electrical laminations and a one stop solution provider for critical sectors. Manufactures electrical laminations up to a diameter of 1300 mm (51") for application in industrial motors, DC machines, alternators, traction motors, pumps, train lighting generators, aeronautics, medical diagnostics equipments, windmill generators, laminations for specialised applications, die-cast rotors, assembled stators and built-up rotors duly balanced. The companies products are used in sectors such as  Power Generation, Transportation, Mining, Industrial motors, Locomotives, Aerospace, Automobile, Oil & gas

·         Pitti has two manufacturing facilities, which are located on 18 acres of own land at Nandigaon village,Hyderabad, Andhra Pradesh. It completed the expansion of the Hyderabad facility in March 2012. This has taken the overall capacity to 30,000 tpa laminations, 2,000 core-dropped machined stator frames and 3,000 machined components. (capacity was 10000 tpa in Jan 2008).

·         FY2008-13 revenue and EBITDA CAGR of 13% and 17% , respectively . The sales and profits were growing at a CAGR of 28% in the last 3 years prior to FY14

·         The company has about 25 clients.The list of clientele includes reputed engineering and electrical concerns such as GE,Otis, Siemens, Cummins, BHEL, Cromptons, ABB, Alstom, Andritz and others. The company has been an outperformer in the industry  till 2012. But due to bad global economic scenario its exports got affected. Even thought the sales are growing on the domestic front, the international exports has come down drastically. GE contributed to more than 70% of the company's sales.Postpontment of orders by GE and company's main dependence on them was the reason for fall in exports.

·         In 2012, the company alloted shares to promoters at 39.15rs. This took the promoters share from 40% to 60%. The company came out with open offer at 41. SEBI directed the company to increase the open offer and the issue is in supreme court now. Even if the open offer is not raised, we have a cusion of 41 rs as a support.

·         This year the company spent 16 crs on improving its maching facility and to remove bottle necks in the line. This Q2, the management has indicated that the company doesn’t plan to raise more debt or equity. The interest payment and debt levels of the company has come down sharply QOQ. The money spent on machining facility will show its effects from Q1 FY15 and allows the company to target consumer segment. Gross block in plant and machinery has increased from 6100 to 9150 in 2 years

·         Last year the company’s capacity utilization was 64% and this year due to bad export orders, the utilization would be around 50%. So I don’t see any reason for the company to do more capex in near term.The management wants to make Pitti a 1000 cr turnover company in next 4 years(currently 350 crs) while maintaining the EBITA margins.

·         Being in Andhra Pradesh, the company used to face 6 hr daily power cuts. The management says that power is no more an issue for the company.

·        Recently the company has entered into new geographies such as Australia and Brazil . They have also ventured into casting business through Pitti Castings . As per the management,the company has been developing several new products, commercial supply to begin in this financial year.

·         The last quarter of this financial year saw the exports picking up again.Also the addition of  Chittaranjan Locomotive Works (CLW) to the clients list enables the Company to enter the railways sector in India.

·         The company is a net exporter. Though the main raw material(high quality steel ) is imported, the export revenues are twice as much import bills. The company plans to maintain Balanced exports and domestic orders to a healthy 50:50 level

·         Even when the user industry is going through such bad times, the company never reported a loss in any quarter. The overall demand outlook from the Indian power sector is to improve going forward driven by various initiatives undertaken by the government to facilitate commissioning of stalled projects. The company also expects the exports to go up and aims a turnover of 20000tpa for FY15.As the capacity utilization goes up, there should be a disproportionate increase in the top-line and the bottom line.In 2011, the company reported its best ever numbers and an eps of 17 rs.At the cmp of 40 rs, the company is available at a market cap of 60 crs  Any improvement in the user industries will help the company go back into its original growth orbit.One should watchout for its case with SEBI regarding open offer

Disc:-Hold few shares of Pitti Laminations (mainly for academic purpose)

MTEDUCARE

1)  MT EDUCARE is the company that owns the 25 year old coaching services brand Mahesh tutorials. The company initially used to provide coaching to Class Xth students of Maharastra State board. But over the years, it has expanded to various other coaching fields too. Now the company Operates under three business verticals – School, Science and Commerce; Diversified product offerings catering to students right from Std. VIII to students appearing for Engineering and Medical Entrance Exams (including IIT Entrance), exams for CA course and MBA aspirants

2)   The best part about MTEDUCARE is its asset light model and negative working capital. The company runs its coaching classes in rented spaces. So it doesn’t need to spent much on capital works. Being into coaching Industry, the company receives the tuition/coaching fees in advance. So it has a negative working capital

3)    The brand MAHESH TUTORIALS is highly reputed in Mumbai. When I contacted a few in Mumbai asking about the tutorial, all had heard about it and said that the institute has good reputation. It is to be noted that Consumer review websites like www.mouthshut.com doesn’t have any negative reviews on Mahesh Tutorials and people are praising the coaching

4)    The company has 226 coaching centres in 138 locations(As on dec 2013). Majority of this is in Maharastra. Now the company is moving into states like Gujarat , Karnataka etc and has presence in 7 states and Union territories. The number of locations has been growing at a CAGR of 26%

5)    Last year the company acquired 51% stake in IIT coaching provider Lakshya(option to buy the rest 49% within 2018). This is a high margin business that will help the company improve its operating margins. The company plans to take Lakshya brand to other states as well(now only in Punjab and Haryana)

6)    Revenues grew 21% and PAT grew 61% CAGR in the past 3 years. Margins showed an improvement of 300 bps(from 8 to 11%). The company has a good ROE of over 20% and is debt free.

7)   The company has set up a PU College in Mangalore. The company spent 50 crs in setting up the campus. The management wants to sell this asset and want to focus back to its asset light model. This is very positive for the company. We can conclude that company don’t have any capex going forward and selling of the PU College can bring in about 70crs. As per the management, they plan to use this money for growth(organic as well as inorganic)

8)  The company has introduced INK coaching for students in class 6^th to 8^th. This model is an two way interactive model where the student can attend class via internet. The company has 28 terminals that can cater to 6000 students. The students enrolled in this program are prospective candidates for coaching in 9^th and 10^th class. So this model not only brings revenue but also does customer acquisition for other models.

9)    The company has a capacity utilization of about 44%.This gives the chance to get more revenues by enrolling more students without any additional expense. The company can leverage its brand and grow.

10)  The company is now focusing on tie ups with PU colleges in Karnataka. It has already made 9 tieup’s and plans to take it to 30 within 3 years. In this model, the students of a college will be automatically enrolled for company’s coaching. The college provides infrastructure and they get a revenue share of 15%. The company is clearly focusing on this asset light system for its growth going forward.

11) The company’s topline showed a growth of  20%(QOQ). But bottom line didn’t grew in that proportion. The management clarified that, because of the new PU College in Mangalore, the company had made more provision for depreciation and that it turn affected bottom line. Once the PU college is hived off, the company will be reporting the same growth in bottom line

12) Going forward the management has guided a 20-25% revenue growth in FY15. Management has so far been able to meet their guidances(projected 200 cr for fy14 and they did it)

13) The company has a very good dividend payout ratio. The company stated that they aim to have 50% payout when they came with IPO(including DDT). The company also has a very good operating cash flow.

14) As per CRISIL,the coaching industry will grow at 15% till 2017. The number of students appearing in school board exams and various competitive exams will be rising. More disposable income with the families and more thrust on quality education, getting students wont be an issue for a coaching institute like Mahesh . It can grow eating into the market share of unorganized players

15) Career launcher may come out with its IPO. This would have a positive impact on market cap of comparable ones like MTEDUCARE

At the cmp of 100 rs, the company is available at a market cap of less than 400 crs.On the expected EPS of 6.5rs for next year, the company is expected to give 3rs dividend. So it’s a dividend yield of 3% on forward earnings. The company is debt free and has cash and cash equilants of 40cr. At a p/e of 19, this is not a stock that is cheap.But i beleive quality will always remian expensive just like what Asian Paints did throughout its life time.On an EV of 360 crs, this professionally managed company operating in the sunrise Education Sector is a worth putting some money.The stock has been range bound and has not moved in the Namo rally.The stock can only move up once it crosses its the multiple tops made at 110 levels

Disc:-I have holdings in MTEDUCARE