Important points to keep in mind

1. Cautious Approach to Recently Listed Companies: We generally avoid newly listed companies due to the prevalent practise of presenting attractive balance statements during IPOs.
2. Exception for This Early-Stage Player: However, in the case of this company, it’s still in its early stages, and management anticipates a pickup in business post next year, aligning with our investment timeframe of 2-3 years post-listing.
3. Factors in Favor: The absence of debt, a positive net cash position, and a healthy promoter holding at around 65% make this company an exception. Investors should exercise patience as meaningful returns may take some time to materialize.

Uniparts India Ltd

Current Market price on the date of publishing this report: 634 Rs

Introduction 

Incorporated in 1994, Uniparts India is a global manufacturer of engineered systems and solutions and one of the leading suppliers of systems and components for the off-highway market in the agriculture and construction, forestry and mining (CFM) having presence across over 25 countries. Its product portfolio includes core product verticals of 3-point linkage systems (3PL) and precision machined parts (PMP) as well as adjacent product verticals of power take off (PTO), fabrications and hydraulic cylinders or components thereof.

The company provides a broad spectrum of engineering solutions, from early idea and development through final implementation and product manufacture. During the conception phase, the company gathers market intelligence, evaluates consumer needs, and develops customised strategies for unique clients. Product design, material acquisition, and processing are all part of the development stage. The validation phase then comprises prototype, rigorous testing, and feasibility analysis.

The company’s in-house production and implementation skills include forging, machining, fabrication, heat treatment, surface finishing, logistics, quality control and testing, and design and validation.

Furthermore, through addressing the aftermarket segment, the company’s goods acquire indirect access to a huge network of retail locations across the world for replacement components. The firm primarily concentrates on the ‘will-fit’ components segment in the aftermarket, serving to wholesalers and retail chain stores.

Uniparts India has five production plants, two in Punjab’s Ludhiana, one in Andhra Pradesh’s Visakhapatnam, and two in Uttar Pradesh’s Noida. In addition, the company has opened a distribution centre in Noida, Uttar Pradesh. In the United States, the company operates manufacturing, warehousing, and distribution facilities in Eldridge, Iowa, which was purchased in 2005 and is now known as Uniparts Olsen Inc. (UOI), as well as a warehouse and distribution facility in Augusta, Georgia. Furthermore, the company’s plant in Hennef, Germany, serves as a centre for serving to significant European consumers.

The company has a strong global presence in the production of 3PL (Third Party Logistics) and PMP (Precision Machined Parts), particularly serving some of the world’s top organisations. The majority of its products are structural and load-bearing components that need precise engineering techniques at various stages of production. Replacement 3PL components are provided to organised aftermarket shops and distributors in North America, Europe, South Africa, and Australia.

Uniparts launched sales to local OEMs (Original Equipment Manufacturers) in India’s agriculture industry in the year 2000, establishing the 3PL OEM product vertical. During this time, the company established its first plant in Noida, Uttar Pradesh. It then increased its reach by serving prominent corporations like John Deere in India, John Deere in Spain, and several OEMs in Japan.

In 2005, the company consolidated its companies, which included Gripwel Fasteners, Farmparts company, and SKG Engineering Private Limited. In addition, the company purchased a production and distribution facility in the United States, notably in Eldridge, Iowa, which resulted in the founding of Uniparts USA Limited (UUL) and a controlling ownership in Uniparts Olsen Inc. (UOI). It also has a warehouse and distribution facility in Augusta, Georgia.

Business 

Company operates in two business areas

Agriculture 

Uniparts Group is a global producer of 3-Point Linkage Systems for agricultural machines.

The Agriculture segment’s product portfolio comprises 3-Point Linkage Systems, Assemblies, Precision Machined Parts (PMP), Power Take-Off (PTO) components, Forgings, and Hydraulic Cylinder Solutions.

The group presently serves its Agriculture clients from production bases in India and the United States, which are seamlessly supplemented by its well-established Global Business model, which includes four warehousing facilities in the United States, Europe, and India.

Construction & Forestry

Uniparts Group is a provider of precision machined parts (PMP) and hydraulic cylinder solutions to the mobile equipment and construction markets.

The market is served by manufacturing capabilities in both North America and India, and it is strongly supported by the Group’s Global Service Delivery expertise, which includes four warehousing hubs spread throughout the United States, Europe, and India.

Uniparts Group joined the hydraulics market in 2007, with manufacturing capability and experience in India.

Product Portfolio

3 Point Linkage (TPL)

Uniparts Group designs and manufactures 3-point linkage systems which used in the production of essential agricultural components, including 3 Point Linkage (TPL) systems, encompass both rear and front hitches. In addition to these critical components, the company manufactures a range of complementary products such as lower links, top links, lift rods, stabilizers, U-frames, and various essential accessories. This comprehensive product lineup ensures that agricultural machinery operates efficiently and effectively, contributing to the seamless functioning of farming equipment and processes.

The group provides a range of TPL such as standard, telescopic, quick coupler, and frame coupler types. The systems are built to be modified for each tractor model and location in which the tractor is utilised, as specifications vary by region. These systems are validated and must adhere to international standards.

Precision Machine Parts (PMP)

Precision machined parts (PMP) are components that must adhere to strict material and production criteria and regulations. Complex product geometries are created using various types of CNC equipment, then heat treated using procedures such as induction hardening, nitrocarburizing, grinding, and surface finishing. These components are utilised in engines, gearboxes, hydraulics, and other Off Highway Vehicle (OHV) applications.

The company has established competence in articulating joints, such as pins and bushes used to link construction equipment booms. PMP products are crucial to construction equipment performance. These are structural and load-bearing equipment parts that must adhere to tight tolerances, standards, and process controls. The design and technical specifications of the product vary depending on the use.

Fabrication

Agriculture and construction equipment both employ small and medium-sized fabrications (no chassis pieces). These parts differ in size, design parameters, and manufacturing process complexity. The company is concentrating on fabrications (e.g. trailer hitch, A-Frame) that are synergistic to its key product verticals 3PL and PMP and allow it to deliver integrated systems and more comprehensive solutions to its clients across a wide variety of applications.

Competencies

The company boasts a diverse range of core competencies spread across multiple divisions, each contributing to its comprehensive engineering solutions:

– **Forging Division:**

•   – Hammer forging
•   – Upset forging
•   – Tool room and in-house die creation
•   – Pro-E & CAM link for product and tools design 
• – CNC & conventional machining

– **Machining Division:**

•   – CNC Turning
•   – Milling
•   – Tapping
•   – Drilling
•   – Thread Rolling
•   – Centerless, cylindrical, and inner grinding
•   – Broaching
•   – Hobbing
•   – Spline Milling
•   – Special Purpose Machines for unique applications

– **Welding Division:**

•   – MIG Welding
•   – Robotic Welding
•   – Butt Welding

– **Heat Treatment Division:**

•   – Normalizing
•   – Induction and furnace-based annealing
•   – Induction hardening
•   – Case carburizing
•   – Through hardening

– **Surface Finish Division:**

•   – Phosphating and pre-treatment processes
•   – CED coating
•   – Powder Coating in various shades

These specialized divisions collectively enable the company to offer fully integrated engineering solutions, ensuring the highest quality and efficiency throughout the conceptualization, development, validation, and manufacturing stages of its products.

Financials

For the Year ended March 23

• Revenue from operations for FY23 stood at INR 1,366 crores with Year-on-year change: +11.3%
• Reported EBITDA for FY23 stood at INR 313 crores with Year-on-year change: +15.3%.
• EBITDA margin stood at 22.9%
• PAT (Profit After Tax) for FY23 stood at INR 204.8 crores with Year-on-year change: +21.3%.
• Operating cash flow generation for FY23 stood at INR 252 crores which was Highest ever in the company’s history
• Uniparts’ balance sheet is net debt-free at the end of FY23
• Company’s net cash position at the end of FY23 stood at Approximately INR 46 crores
• Company had declared Second interim dividend of INR 6 per share, in addition to the earlier interim dividend of INR 8.25 per share.
• Cumulative dividend payout to shareholders stood at Approximately 31% of full-year PAT
• Full-year capex spend stood at Approximately INR 31.5 crores

Financial Highlights for the First Quarter, for Q1FY24: 

• Revenues from operations in the first quarter stood at 297 crore rupees representing a -14.4% year on year change.
• Reported EBITDA for the first quarter stood at Rs. 60.2 crore representing -20.9% year on year change. 
• EBITDA margin stood 20.3. 
• PAT (Profit After Tax) for the first quarter stood at Rs. 37.1 crore with Year on year change of -26.5%
• Operating cash flow generation for the first quarter stood at Rs. 46 crore
• Working capital improvement (inventory, AR, and AP) throughout the quarter: about Rs. 9 crores.
• Company has a net debt-free balance sheet. 
• The company’s net cash position was about Rs. 54 crores.
• For the quarter, CAPEX (Capital Expenditure) was around Rs. 8.2 crores.

Management’s comments

Certainly, here’s a summary of the provided information in 2-3 bullet points:

• Material prices appear to be slightly higher, but when freight charges are decreased, the entire cost remains consistent.
• The warehouse business model constantly produces increasing margins, which are now at 47%, with a long-term target of attaining 47-48%.
• Despite fewer sales, EBITDA remains over 20%, and future reductions in freight and material costs are predicted to increase operating profit margins (OPM) by 1-2%.
• The 50 crore drop in the company’s topline revenue might be ascribed to a variety of causes. Notably, a sizable chunk, around 27 crores, is the consequence of inventory destocking, which accounts for more than half of the observed reduction. Furthermore, price savings relating to freight expenses are projected to be about 8 to 9 crores. It is crucial to highlight that a significant percentage of the revenue loss is attributable to inventory modifications and pricing adjustments owing to freight costs, rather than a decline in real client usage. 
• The UTV ATV collaboration is prospering, and early-stage collaborations with other aftermarket chains have begun, promising a strong expansion plan.
• FY25 is expected to outperform the typical 16% forecasted long-term growth rate, indicating a higher proportion of increase.
• The company is still dedicated to its long-term growth target of 16%, which is supported by the robustness of its business model.
• While there may be swings, the company’s growth is based on long-term market expansion, new business endeavours, and market share increases.
• FY25 is likely to benefit from a favourable cycle, with greater stockpiling contributing to growth.
• Several measures to boost EBITDA margins have been undertaken by the company during the last 4-5 years. The move to the warehouse model was critical in increasing profits. Unprofitable items were eliminated after a thorough analysis of their profitability. These efforts all led to the substantial rise in EBITDA margins beginning in FY21.
• The company’s initial goal was to raise EBITDA margins from 13%-14% to 17%-18%, but it exceeded expectations, resulting in a strong financial position.
• Despite reduced sales this year, EBITDA remains above 20%, and PAT has remained between 12.5%-13%, demonstrating the company’s resilience and excellent cash flow, while the normalised objective remains intact.
• The targeted ROCE internally for the next five years is set at a minimum threshold of north of 30%.
• Ocean freight prices have significantly reduced from historical highs in late FY22 and early FY23, now nearly back to pre-COVID levels.

Sectorial Outlook

India is quickly becoming a desirable manufacturing site, owing to factors such as trained labour and a favourable business climate. The planned $1 trillion infrastructure programme in the United States is intended to promote economic development and increase demand for construction equipment.As global businesses diversify their supply chains, India stands to benefit the most from the China +1 approach. Strong farm revenue throughout the world is driving rising demand for high-value agricultural equipment. India’s importance as a manufacturing hub is increasing in an ever-changing global economy, underpinned by considerable investments, infrastructural expansion, and global supply chain diversification. As India maintains its economic resilience and development prospects, these major growth drivers are projected to influence future possibilities in a variety of industries.

Conclusion

Uniparts India, a debt-free and cash-rich 28-year-old Indian multinational manufacturer, is at a turning point in its growth trajectory. The company’s management expects a difficult route in the next quarters, as seen by their previous projection of 15-18% topline growth, which has now been lowered without precise figures.

However, despite the current uncertainty, Uniparts India is committed to excellence. The management anticipates better clarity to emerge in the second or third quarter of this year, with a strong expectation that growth momentum would build up considerably in the next year. Notably, management anticipates that the Operating Profit Margin (OPM) would continue within the present range, but the Return on Capital Employed (ROCE) will is projected to be around 30% in the coming period.

Uniparts India is a potential the company in the industrial environment due to its strong financial position, worldwide production capabilities, and adaptability to changing market conditions. Uniparts India continues to pave the road for a successful future by focusing on innovation, quality, and sustainability. This is what makes Uniparts India a company worth exploring, where opportunities for growth are limitless.