“Never catch a falling knife”- Though the auto sector has been slumping for quite a while and we’ve been on the lookout for some exciting value investing opportunities with a very wide moat.
Though what got our attention towards this company was a tax shield, an overseas expansion and fading competition.
Rajratan came up on our MWI scanners on 26th July’ 2020 at 263.45/sh, while researching major suppliers to the Tyre Industry who could benefit from the speculative upcoming demand in the tyre sector. The company is a leading manufacturer of “bead wires” which though makes up less than 3% of tyres is in fact one of the most important requirements to ensure the tyre grips on to the rim of the wheel. Owing to the industrial specialisation and requirements, entry barriers are high.
However, most major steel companies have been involved until recently post the IL&FS crisis and the Covid crisis when these major steel companies decided to consolidate and get back to what makes a major chunk of their revenues which has allowed Rajratan to expand market share.
What we got at 263.45/sh or a Rs. 267.2401 Cr :
- A company with an SGR of 20% at 12.0923x Price to 5yr Avg PAT and a nominal D/E ratio of 0.84, viz.- high growth and at low earnings multiple. However low market capitalisation meant slightly higher liquidity risk.
- A multinational company with a substantial market share:
- 35% market share in the Indian Domestic Market
- 20% market share in Thailand
- Over the recent years Thailand has seen a surge in Tyre manufacturing from global players which has only gone higher owing to the “China +1” strategy and a very accommodative government in Thailand.
- This, puts Rajratan as the only manufacturer of bead wires in Thailand in a very sweet spot.
- added with a tax-shield offered to the company from the Thai Govt
We were particularly impressed on how the company’s operations were not very significantly impacted, strong demand pickup in tyres and in control raw material prices. The company also managed to reduce the DE levels from 0.84 to 0.77 but also the stock price has seen a meteoric rise from 263.45/sh to 416.85/sh (as at EOD 11th Dec’2020) viz.- 58.227%
Though we continue to remain invested, since most of these are major value unlocking triggers and the company is a small-cap stock it only makes sense to buy it at defensive valuation multiples.
We will be extremely watchful of:
- The debt/equity levels since an interest coverage ratio below 10 is not something we usually particularly like.
- Increase in competition as normalcy returns both domestic and globally
- Raw Material prices
- The expiration of its tax shield abroad.
Going ahead, we believe the stock of Rajratan Global can soon be trading at 556/sh or Rs. 564 Cr (market capitalisation), valuing the company at 17.09x Price to FY20 PAT (which was 33 Cr) by the end of FY21
Disclaimer: This post has been is only for educational purposes and should not be construed as an investment advice