Friday, December 18, 2015

Annual Report Analysis (Jamna Auto Industries) Part 2

In the last post i had mentioned some facts from the annual report of Jamna Auto Industries(JAI) for the year 2015. The annual report seemed intriguing, management seemed to be making the right noises and it warranted a deeper look. Hence, I dived into the past annual reports of the company going right back to 2009, and followed progressively to 2015, reading all seven years, step by step. This, I believe is the correct way of reading annual reports as it helps in understanding the view of the management and also check whether the management has walked the talk in the past. This helps in building a level of trust which is essential while taking bets on the management. Anyways coming back to the topic, i present below facts and excerpts from the last seven years of JAI which I found to be interesting. Before I present the facts a few pointers to take note of:
  • This is not a complete synopsis. I present only the facts i found interesting. I encourage everyone to dig further and present more interesting facts on the company
  • With the facts i present some questions which arise or which needs to be checked further for validation
  • I have presented my questions in brackets just next to the facts and i have picked excerpts straight from the annual report which are in italics
  • This is just another part in the series of Annual Report Analysis, as i do further reading i will present answers to the questions which arise out of the facts from the report
  • Annual Report Summary & Questions
  • JAI has decided to supply air suspension units and has signed a technical assistance agreement  with the US based Ridewell Corporation for manufacture of air suspension and components (Need to explore how strong Ridewell Corpn. is in its home market and whether their technology is superior?)
  • Planned to set up a greenfield plant in Jamshedpur catering solely to Tata Motors but put on backburner due to slowdown in CV market
  • Production through subsidiary Jai Suspension Systems (LLP) has started. The subsidiary will cater to aftermarket sales (Should compare figures of subsidiary over past 6 years to see how far have JAI been able to diversify by increasing aftermarket sales)
  • Planning to derisk from over concentration on OEM market, has decided to focus more on domestic and export replacement market
  • Tata Motors converted from leaf springs to parabolic springs for two of its popular HCV’s which will lead to higher margins for JAI
  • Received LOI from UD Trucks Japan for supply of leaf springs
  • Leader in leaf springs and parabolic spring space. Exploring leadership in Air Suspension and Lift Axle space (Need to dig deep on penetration of air suspension and lift axle space in Indian CV market and margin difference between conventional suspension system and air suspension system)
  • “We will continue to focus on higher ROCE and improve PBT margins through better product mix, enhanced capacity, reduced debt as well as by further expanding our distribution network and market reach”(Should compare performance across 2011-2015 to check whether numbers conform the management commentary)
  • The company is working towards the goal of bringing down the share of revenue of Leaf Springs from the present level of 90% to 65% and increase share of other product such as Parabolic Spring, Air Suspension and Lift Axle
  • With the new production lines at Yamuna Nagar already having come up in stream in January 2012 and Malanpur coming on stream in September 2012, our production capacity for leaf springs and parabolic springs will be 50% higher than the peak production of 144,000 tonnes reached in 2011-12. With this expansion, we will be the second largest player in the world(Capacity coming onstream at a time when markets for CV were buyoant)
  • As we grow our business and position the company for future growth and profitability, we will be mindful of our financial objectives to ensure that our net block is funded out of net-worth, to consistently generate strong cash flows, to earn a ROCE of 33% and to distribute 33% of profits as dividends to shareholders (Always good to hear the management of a cyclical company talking about sustainability and preparing business to be better prepared for an adversity)
  • Implemented de risking plans to tap new markets, expand product portfolio and locations. Took initiatives to improve cost efficiency across all plants to maintain EBITDA level and as a result decrease breakeven level for the company. “As compared to the recession during the year 2008-2009 when these plans were not in place, the Company had lost sale of 4% but incurred a net loss whereas during the FY 2012-2013 the Company lost sale of 12% and earned profit after tax of Rs 28 crore.” Here we can see validation of the de risking efforts of the company
  • We may also see competition growing up in the tapered leaf and parabolic spring business in the coming years with entry of new tapered leaf springs manufacturers. The overall near term outlook of the industry appears to be weak(Good to see management recognising competition in the sector, will help in being proactive)
  • Another excerpt from the annual report which helps alleviate competitiveness fears “·         We produce 410 types of springs to OE customers; each type of spring has a development time. It will not be easy for any competitor to develop and supply all these types of springs in a shorter period of time”
  • Outlook for 2014 “The current financial year will be challenging. The overall near term outlook of the industry appears to be weak and demand for CVs is expected to be subdued in the current year as well”
  • During FY14, the company made inroads into and achieved significant scale of operations in countries which are currently dominated by Chinese vendors. Going forward, we aim to export our products to USA, Europe and Africa
  • Air suspension is a type of vehicle suspension powered by an electric or engine-driven air pump. While this technology has entered India, its uptake is still in single percentage points, unlike in developed countries where the majority of buses run on air suspension(Market opportunity for air suspension seems big considering current buses mostly running conventional suspension systems)
  • Lift axle suspension helps increase load-bearing capacity. This technology reduces the wear and tear of the auto parts whenever a truck runs below a specified Gross Vehicle Weight (GVW). Over time, this technology increases the life of the truck and also reduces the maintenance cost. The company is already supplying Ashok Leyland with lift axles. During the year, we also added on Asia Motor Works Ltd as a customer
  • During the year under review, the Company has incurred only need based capital expenditures to conserve cash. The Company has closed down Lucknow Plant as a cost control and rationalization measure(Company seems to have learnt sustainable expansion)
  • In FY16, we plan to spend Rs 75 crore to expand capacity by 30,000 MTPA which will come on line by Q1FY17 at our Hosur plant (New capex outlined)
  • As a testament to our financial performance, we achieved continuous improvement in our credit ratings. In FY15, ICRA upgraded our ratings: Long Term Rating from LBBB- to A-, Short Term Rating from A3 to A2+ and further improved Long term rating to 'A' and Short term 'A1' in the month of April 2015(Credit ratings have been upgraded continuously over the last two years - signs of improved financial strength of the company)
  • “We are, very excited about the future of the CV industry.” “We, at JAI, are ready to cruise ahead with a leaner structure. We expect the next couple of years to be exciting, marked by increases in market share and new products growth.”(Positive tone in the annual report by the management backed by purchase of own shares when Clearwater Partners offloaded their stake in December 2015)
  • We have improved our debtor and inventory management systems. Our enhanced credit quality is reflected in ICRA upgrading our credit rating from LBBB- to A- (long term) and from A3 to A2+ (short term). The credit rating was further improved to A (long term) and A1 (short term) in April 2015. We will continue to invest from internal generations to create meaningful capacities in the future.

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