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Last Updated : Jan 08, 2019 02:26 PM IST | Source: Moneycontrol.com

Ideas for Profit | DISA India: Accumulate this high quality business amid a downturn

The current weak phase in the stock is a good opportunity to accumulate this high quality business for the long term

Madhuchanda Dey

Highlights:
DISA India (DIL) promoted by Denmark-based DISA Holdings
- DIL manufactures foundry machinery and parts
- Fortunes linked to industrial growth
- Higher capacity utilisation, automation of foundry and outsourcing key growth drivers
- Steady long term financials

Weak phase ideal time to accumulate for the long term

DISA India (DIL) is the Indian arm of Denmark-based promoter company DISA Holdings, which owns 74.8% stake and in turn operates under the umbrella of the Norican Group. The latter is home to four leading, globally operating technologies: DISA, Italpresse Gauss (incorporating Italpresse Industrie and Gauss Automazione), StrikoWestofen and Wheelabrator.

DIL is a leading equipment manufacturer with advanced foundry and surface preparation technology. It supplies complete foundry system by integrating international range of moulding machines and sand mixers with proper combination of sand plant equipment.

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The company mainly caters to ferrous casting industries, which are used in heavy commercial vehicles and tractors, by providing complete foundry machines and solutions. Wheelabrator division provides shot blasting machines for surface cleaning of castings produced at a foundry.

Industry fortune dependent on GDP and industrial growth

IIP (Index of Industrial Production) and PMI (Purchasing Managers Index) have historically been decent indicators of business sentiment with regard to order intake of capital goods. While there is no overt sign of a revival in these key economic indicators, the probable softening of interest rates, decline in crude oil prices and political stability post general elections could be big drivers of industrial activity.

DIL’s growth is directly linked to growth of the manufacturing industry and capacity expansion by various sectors like automobile, agriculture, infrastructure and engineering goods. Around 32% of foundry industries output goes to the automobile sector.

Commercial vehicle scrapping policy and Euro VI implementation from March 2020 will be beneficial for the company. With strong impetus on developing industrial corridors and smart cities, the government aims to ensure holistic development and long-term drivers of industrial activity.

Capacity utilisation moving up

In FY19, the company has started witnessing high utilisation of existing foundries. Customer demands are going up, and so is the challenge on foundries to produce more from existing assets and to invest in new capacities. This phenomenon has given a positive trend for the industry. Around 4,000 to 5,000 foundries are present in India with an estimated capacity of 13 million tonne. The number of foundries have reduced from around 6,000 due to bad economic condition in the last few years.

Automation an emerging opportunity

Indian foundries are facing a problem with lack of skilled manpower and increasing labour cost. DIL offers complete automatic solutions to the foundry industry, which requires minimal manpower, reduces labour cost and improves productivity. Currently, a very small proportion of foundries are automated, which provides the company a huge opportunity

Possible increase in outsourcing

In order to take advantage of the low cost of manufacturing in India, its parent company is considering DIL as a manufacturing hub for its global supply. Post the global merger of Wheelabrator Group with DISA (leader in manufacturing of shot blasting machines), Wheelabrator's products are exclusively marketed by DIL. Filters contribute  around 15% of revenue and DIL sells these products with foundry machines as well as standalone products. With strict environmental norms, the use of filters is expected to improve.

Steady financials

In the past 20 years, despite being present in a cyclical industry, the company has never slipped into the red in any year, which is a hallmark of a good quality business. In the past 10 years that was marred by industrial slowdown, the company grew its revenue at a compounded annual growth rate of 7.4%, operating profit by 2.8% and after-tax profit by 3.1%. The company has a very healthy balance sheet with no debt and has a consistent track record of paying dividend.

Risks

DIL depends heavily on the foundry industry, manufacturing heavy casting for heavy commercial vehicles and tractors. The business is therefore vulnerable to economic downturns. Increase in raw material costs like iron ore prices impacts offtake from foundries as end-customers might be reluctant to accept a price increase. Any restriction on foundries imposed by the government on environmental concerns can impact business as well. Finally, cheaper imports from China too is a threat to the business.

 

Outlook

DIL

The stock has corrected close to 26% from its 52-week high and trades at 31 times FY20 estimated earnings. While a full-fledged industrial recovery will have to still wait for a couple of more quarters, the current weak phase is a good opportunity to accumulate this high quality business for the long term.

 

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First Published on Jan 8, 2019 02:25 pm
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