{"id":1153,"date":"2019-04-07T20:47:00","date_gmt":"2019-04-07T20:47:00","guid":{"rendered":"http:\/\/oscillationss.blogspot.com\/?p=1153"},"modified":"2019-04-07T20:47:00","modified_gmt":"2019-04-07T20:47:00","slug":"hercules-hoists-ltd-warehousing-automation","status":"publish","type":"post","link":"https:\/\/oscillations.in\/?p=1153","title":{"rendered":"Hercules Hoists Ltd: Warehousing Automation"},"content":{"rendered":"
\n
\nStock investing is all about value
\ninvesting i.e. picking a stock at a price which is much lower than its
\nintrinsic value (real worth). And most people think that this real worth is basically
\na handiwork of financial analysis which calculates Real worth of a stock based
\non earning growth, balance sheet strength etc. But this is just post mortem.
\nThe most important factor in the value investing formula given by Sir Benjamin
\nGraham was not the evaluation of these financial parameters but it was the
\nmysterious \u201cg\u201d in his formula which was the most important factor in the
\nvaluation matrix. This \u201cg\u201d denotes the future growth rate and this is where investing
\nstarts and ends. This growth rate is not a financial entity it is just represented
\nas a financial figure.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nTo understand the growth prospects
\nof a company requires thinking like a businessman. One has to understand the
\nwhole nitty-gritty of a particular industry-raw material, substitutes, strength
\nof entry barriers, user industry, global competition, future threat or
\nopportunities\u2026and the list is endless but this concludes why stock analysis is
\nso complex because it looks like dealing in finite numbers but it is most affected
\nby infinite business\/economic variables. This effectively means looking into the
\nfuture demand supply trends and this is where creativity, intuition, wisdom and
\nknowledge enlarge the vision to sniff the future much ahead of others and this
\nis the most decisive factor in business and in stock investing.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nSometimes I feel that stock picking
\nis getting increasingly difficult. In old times, there was information scarcity
\nand only the privileged ones had the timely access to relevant financial and
\neconomic data affecting companies in stock market and so they could pick
\nvaluable gems cheaply and much early. But today most of the data is available freely and quantum
\nof privileged data is very less (although that is still important). But this
\ndemocracy in data availability means one has to expand his vision further to
\nlook far deeper into the future and gasp the coming economic trends.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nWe are also in our journey to
\nunderstand what changes GST will bring into the business land scape of India. Logistics
\nis no doubt one sector which is going to see revolutionary changes because in
\nits earlier avatar it was most effected by fragmented structure of Indian
\ntaxation system where each state has its own set of taxes and businesses were
\ntaking investment decisions not from the point of view of operational and
\nbusiness sense but to save multiple state level taxes.<\/span>
\n
<\/span>
\n<\/span><\/p>\n
\nGST is a massive financial engineering and it is bound to change the way
\nwe were doing businesses. In an ideal economy, business decisions should be
\nbased on sound operational economics and efficiency rather than an exercise to fit
\nthe business operations into the tax or accounts regime. Tax\/revenue
\nauthorities should keep the business economics in mind while framing tax laws
\nrather than businesses designing their businesses to tax laws because taxes do not generate business profits rather businesses generate the resources for taxes.<\/span><\/span>
\n
<\/span><\/div>\n<\/div>\n
\nEarlier, we have
\npicked Hercules Hoist Ltd (Click here for earlier study)<\/a> as one of the beneficiary of impact of GST on
\nlogistics.<\/span> In the past one year after we picked Hercules Hoist things
\nare looking in much better shape.<\/span><\/div>\n
\n<\/div>\n
\n<\/div>\n
\nGST to
\nrevolutionize the warehousing in India<\/span><\/u><\/b><\/div>\n
\n
<\/span><\/u><\/b><\/div>\n
\nSupply chain and logistics is the
\nmost important function in the entire chain of production to final consumption
\nand it requires huge resources. And warehousing is the most important part of
\nthe entire logistic function because excellency in warehousing implies low cost
\nof warehousing, low inventory levels, low pilferage but earlier due to state
\nlevel taxes like CST companies planned their warehousing just to avoid high
\ntaxes. Earlier, every state was a foreign territory as far as movement of the goods was concerned and each state levied a number of taxes on goods coming into their state from outside state. But amid this complex tax structure, some relaxations in taxes were given like when goods were moved inter state not out of sale but stock transfers no CST\/Entry tax was charged. So companies, in order to avoid multiple level taxes, just operated small inefficient warehouses in each state and
\nthis along with other factors has resulted in higher logistics costs which are
\ntwice (14% of GDP) the cost in developed countries (7% of GDP).<\/span><\/div>\n
\n
<\/span><\/div>\n
\nSo warehousing in India only meant \u201cgodowns\u201d
\nwhich were just a structure with no automation and did not provide any value
\nadded services. So companies operated small shabby warehouses in each state
\nthey operated which resulted in operational inefficiencies and huge resources
\nwere blocked in the form of high inventories, maintenance of large number of inefficient
\nwarehouses.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nBut all this has been going to
\nchange after the implementation of GST. After GST there are no state level
\nmarkets and India is a one big market and no matter from where you operate the
\ntaxation is same. so now companies can plan their supply chain and logistics
\nkeeping in view the operational efficiencies rather than tax savings.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nEarlier, the focus on tax saving
\nresulted in small low tech warehouses and the average size was some 10000 sq
\nfeet and almost 90% of the warehousing space is controlled by small unorganized
\nplayers. At this small scale it was not possible to invest in mechanization and
\nautomation. So there was no economy of scale, no control and overall
\ninefficiency. But after GST, the average size of a warehouse has touched 1 lac
\nsq feet and companies are investing big in mechanization and automation and so
\nnow the true worth and value of a good warehousing system will be realized. Warehouses
\nof the size of 4 lac-5 lac sq feet are underway.<\/span><\/span><\/div>\n
\n
<\/span><\/div>\n
\nAs one can see, it is impossible to
\nmanage these large scale warehouses without being equipped with smart mechanization and automation.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nSo these smart fully
\nequipped warehouses present huge opportunity for Hercules Hoists which is one of
\nthe largest suppliers of material handling solutions in India.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nWarehousing industry is undergoing
\ngreat consolidation and increasing merger and acquisitions will take place and
\nthe sizes of warehouses will increase significantly to make possible the
\nautomation. This greater scale will also positively impact the IT cost of
\ndeploying Warehouse management system (WMS) and ERP systems which was not
\npossible earlier and due to these technical advancements in warehousing entire
\nsupply chain will reap the benefits.<\/span><\/div>\n
\n<\/div>\n
\n<\/div>\n
\nApart from GST, there are other
\nreasons which are creating the demand for large scale automated warehouses:<\/span><\/div>\n
\n
<\/span><\/div>\n
\n1) The
\ngrowth in manufacturing due to \u201cMake in India\u201d initiative. <\/span>High end
\nlarge and smart Warehousing and logistics systems are required to support this
\nscale of growth in manufacturing.<\/span><\/div>\n
\n
<\/span><\/div>\n
\n2) The
\nwarehousing and logistics sector has been granted the infrastructure status <\/span>which
\nmeans they can get funds cheaply with payment stretched much longer time.<\/span><\/div>\n
\n
<\/span><\/div>\n
\n3) The
\nhuge demand for high tech large scale warehousing from E-commerce sector.<\/span>
\nE-commerce is all about reaping the benefit of scale so large fully automated
\nwarehouses are the first thing they need to create value for themselves.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nHence, no doubt these large smart
\nwarehouses are going to save the costs of logistics of companies.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nThe most important
\nfactor is reduced inventory costs<\/span><\/u>. Inventory consumes huge resources
\nin the form of cost of production, storage costs, theft, damage, obsolescence
\netc. So optimal inventory levels are the ultimate aim of any supply chain as
\nthe same will maintain the overall efficiency of entire supply chain. Earlier,
\ncompanies were always facing either the situation of excess inventory or low
\ninventory leading to loss of business.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nInfact, the efficiency of a supply
\nchain system is gauged from the levels of inventory-how much capital is lying
\nidle due to inventory carrying costs which can otherwise be used for other
\nproductive uses. So optimal inventory level is the prime aim of any supply
\nchain manager.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nDue to the use of hub and spoke
\nmodel for inventory control across the entire supply chain, faster movement of
\ngoods due to fewer\/no state border checks, lower number of warehouses, higher
\nefficiency of warehouses due to automation etc. means companies can maintain
\npre-GST supply chain service levels with much lower levels of inventory as they
\ncan move the goods fast. So no surprise that inventory costs are coming down. As
\nper recent studies, inventory levels have come down by some 30%-40% which are
\nincreasing the profitability.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nConsumer durable industry is going
\nto see almost 50% fall in warehousing costs while FMCG sector will see 25%
\nfall. This is due to the fact that lead time for consumer durables are around 2
\ndays so consumer durable players can easily supply the existing markets from fewer but
\nlarger warehouses like from Haryana warehouses they can cater to Punjab,
\nUttarakhand, UP and Himachal Pradesh easily which are major consumption centers
\nin the country.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nThe stock turnaround time for FMCG
\nis much lower (24 hours) due to reasons like small scale of
\ndistributors\/retailers, availability of substitutes in the form of other brands
\nso they are required to maintain more warehouses as compared to consumer
\ndurables but still due to operational efficiencies their cost will fall some
\n25%.<\/span>
\n
<\/span>
\nSo as we can see the investments in smart warehousing will be more than offset by the savings in the cost of carrying inventories.<\/span>
\n
<\/span>
\nAlso, small and low key warehousing further takes away the scope of movement of cargo by rail due to short distances as railway frieght is cheaper by some 30-40% in long distance cargo. I feel, with the coming of dedicated freight corridor warehousing and logistics will be further benefited.<\/span><\/div>\n
\nFurther, there will not be much consolidation in clod chain logistics as they are very capital intensive to build and so it is not easy for companies to leave some capacity just like that which they can do for low key warehousing where their investments are low.<\/span>
\n
<\/span><\/div>\n
\nThe
\nwarehousing sector is witnessing big activity<\/span><\/u><\/b><\/div>\n
\n
<\/span><\/u><\/b><\/div>\n
\nEarlier, due to small size and
\nsmall opportunity, large organized players and PE investors have avoided
\nwarehousing sector. But now this is one of the most sought out sector. In the last
\n4 years, investors have put around $3 billion in warehousing and this accounted
\nfor around 26% of the total private equity funding in the real estate sector
\nduring this period.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nDemand for Grade A warehouses
\n(Large automated) is growing and going to cross about 300 million sq feet by
\n2022 from approx. 140 million sq feet in 2018. So as we can see, this requires
\nmassive investment in capacity in the coming 3-4 years.in the next 2 years, investments
\nof around Rs. 45000 cr are going to be made in grade A\/B warehouses and some
\n100 Million Sq feet of warehousing space will be created.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nGrand
\nopportunity for Hercules Hoists Ltd<\/span><\/u><\/b><\/div>\n
\n
<\/span><\/u><\/b><\/div>\n
\nSo, this gigantic scale investments
\nand activity in large format warehousing is going to create high demand for
\nmaterial handling equipment for warehousing and this is where Hercules Hoists
\nltd comes into picture.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nHercules Hoists has established itself
\nas most trusted brand in Indian material handling market and cater to almost
\nall of the manufacturing industries including logistics and counts leading
\nmanufacturers as its customers. It operates under \u201cIndef\u201d and Hercules \u201cHoists
\nbrands\u201d.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nThe scope of its products for
\nmaterial handling systems in warehouses is enormous. Like, its electric wire\/chain
\nhoists can be used for overhead material handling in the warehouses. Overhead
\nmaterial handling in the warehouses increases productivity, enhance safety,
\nimprove ergonomics and maximize available floor space. It has many other
\ninnovative products like iCranes and iStacker which are created for logistics
\nsector. I do not see any reason why Hercules should not be able to benefit from high demand for warehouse mechanization and automation.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nAlthough, Hercules Hoists provides
\nmaterial handling solutions to a number of manufacturing industries but I think
\nits high growth phase is coming now due to growth in warehousing and further
\ndue to the revival of investment cycle in other industries. Indian industries
\nwere slow on capital expansions due to high debt levels in the past, high
\ninterest costs, bank NPA\u2019s resulting in banks not providing loan to industries.
\nBut now after a long period of consolidation the investment cycle is going to
\npick up. <\/span>
\n
<\/span>\n<\/div>\n
\n
<\/span><\/div>\n
\nRecent
\nfinancial performance points towards revival<\/span><\/u><\/b><\/div>\n
\n
<\/span><\/u><\/b><\/div>\n
\nIts operational performance in the recent
\n2 quarters points towards revival in its fortunes. In sep-18 quarter results,
\nits turnover increased to 30 cr from 17 cr in sep-17 while its PBT excluding
\nother income was at 3 cr vs 20 lac. Similarly, in Dec-18 quarter results, its
\nturnover increased to 25 cr from 17 cr in Dec-17 while its PBT excluding other
\nincome was at 2 cr vs 70 lac.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nI think, companies were waiting for
\nmore clarity on GST laws\/rules before going ahead with their investment plans
\nin warehousing etc. So it was not that they started investing in warehousing
\nright after GST in July-17 instead they waited for the clarity and common
\nsense. I think 2018 was the year of action and from now on the pace is only
\ngoing to increase so it is possible that we may see high growth in the topline
\nof companies related to this space like Hercules Hoists.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nI am waiting for mar-19 quarter
\nresult for Hercules and I think it should see some 80%-100% growth in the
\ntopline. Further, Hercules does not need any capital investment so soon as I think
\nit can sustain the topline levels of 300-400 cr without any capacity expansions
\nso it implies we are going to see the major impact of this growth in the scale
\nof operations for Hercules in the bottom line as it is also nil debt company. Further, as a nil debt and Bajaj group company there will be no shortage of funds in case it needs investments in capacity expansion in the future.<\/span>
\n
<\/span>
\nAt present, i care more about the growth in top line than bottom line because there is huge scope of growth in scale of operations. And at current low scale of operations bottom line anyway is not relevant. But still even at such a low scale of operations, at CMP of 115 it trades at PE of 28 (If we take into account the recent performances then the same will around 20-23) which is good because at this juncture i could not have cared even if it was in losses. But this better financial performance is due to conservative and superior use of capital.<\/span>
\n
<\/span><\/div>\n
\nI am buying this one regularly and
\npicked good quantity when it fell below 100. Few days back, picked at 115. CMP is 115.<\/span> This
\none is good high quality Tier 3 stock (Risky) and I think this may turn out to
\nbe another Nelco for us.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nBut this being Bajaj group stock,
\nnil debt and investments in its books provides high margin of safety and even I
\nput it as Tier 3 but this riskiness is not due to its books\/balance sheet
\nweakness but due to the fact that most of its valuation will come from future
\ngrowth only.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nFurther as explained in the earlier
\npost that <\/span>it is having stocks of various
\nBajaj group companies like Bajaj Finserv, Bajaj Auto, Bajaj Holdings and Bajaj
\nElectricals and MF valuing some 250 cr, has 2 acre vacant land in Mulund in
\nMumbai (I think it should get around 70-80 cr). So out of 400 cr market cap, some
\n320-330 cr (80%) belongs to Investments and land. So we are getting the rest of
\nthe company with one of India\u2019s best material handling brand for just 20% (80
\ncr). It earns around 10-12 cr as dividends from these investments which
\nprovides the stability to the bottom line.<\/span>
\n
<\/span>\n<\/div>\n
\n<\/div>\n
\nApart from Hercules Hoists, I think
\nRedington, which is my another favorite stock, is going to be benefitted from
\nGST due to low cost of inventory for its distribution business and its focus on
\nthird party logistics business. Other large scale Logistics players like Mahindra logistics and Future supply chain will also be the key beneficiaries. <\/span><\/div>\n
\n
<\/span><\/div>\n
\nAlso, these giant scale warehouses
\nneed Pre-fabricated steel\/material and Pennar Engineered building solutions and
\nEverest Industries can be the beneficiaries as these two are one of the biggest
\nbut I have not studied these two in detail so not in a position to offer any
\nfurther view.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nIn the end, I am going to touch
\nsomething about the high standards of Bajaj group and this is why I think even
\nafter being a small company Hercules is still a safe bet for us.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nSomething
\nabout Bajaj group<\/span><\/u><\/b><\/div>\n
\n
<\/span><\/u><\/b><\/div>\n
\nLet me share something of my
\nopinion about Bajaj group. Bajaj group is one of the best professionally
\nmanaged group. Their family members start the job right from the shop level and
\nthey have to prove their mettle. Nothing is based on the family ownership quite
\nunlike other promoter owned companies. Very few people know the strong family
\nroots of Bajaj brothers. They are incredibly smart and choose the best person
\nto run the business keeping apart their egos and family ownership.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nRahul bajaj is the current
\npatriarch of the family\/businesses and he is an institution in himself. He came
\nto the small town Akurdi in 1965 (Bajaj Auto) and he still stays in this small
\ntown in factory colony. I have great respect for Rahul Bajaj and I think he was
\nand is way ahead of the likes of Munjals, Ambanis. There was a time in 1970\u2019s
\nwhen there was a 10 year waiting for Bajaj scooter but still Rahul never tried
\nto profiteering (as people were dying to offer much more than the market price)
\nbut still Rahul offered the best scooter and authentic price.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nBajajs are very down to earth
\npeople. The founder Jamnalal Bajaj had two sons- Kamalnayan and Ramkrishna
\nBajaj. Both were ardent followers of Gandhi and Jamnalal donated everything to
\nGandhi. Both sons were the real force behind the growth of the empire.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nNow let me come to the bigger
\nstory-The current leader Rahul is the son of Kamalnayan and Shishir was his
\nbrother and a sister Suman. Ramkrishna has three sons- Shekhar, Niraj and
\nMadhur. But for the entire world they were five brothers\u2026there was nothing like
\ncousin brother between them and the most able of them was running the best
\ncompanies\u2026in fact Bajaj Auto was created by Rahul so he was the leader. But
\nstill entire family shared everything\u2026they have pocket money, leaves etc. in
\nequality. However in 2000\u2019s there was a fight between brothers and Rahul was
\nshocked when one of 5 brothers wanted separate business. He along with other 4
\ntried hard to persuade him to stop demanding. You\u2019ll be surprised to know that
\nit was Rahul\u2019s real brother Shishir who was fighting and other 4 were together
\nand Rahul was leading them. Shishir\u2019s son Kushagra was over ambitious albeit
\nwith great abilities but he wanted to build something on his own. <\/span><\/div>\n
\n
<\/span><\/div>\n
\nSo brothers parted (Only one) and
\nShishir got Bajaj Hindustan and Bajaj Corp (I think they own some big power
\nplants also). But rest of the 4 brothers are still together and running the
\nother giant group companies. Rahul\u2019s sons Rajiv and Sanjiv are running Bajaj
\nAuto because they have proved their ability. Even Rahul had many differences of
\nopinion with son Rajiv (like stopping scooter production which Rahul did not
\nwant) but still he never interfered and Rajiv has his own style. But Rahul has
\nalways praised him for his toughness and leadership.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nShekhar Bajaj runs the other Bajaj
\nhouse biggie-Bajaj electrical.
\nMany times Rahul has told that his younger brother Shekhar has never doubted
\nand wanted a place in Bajaj Auto as he knows that Rahul is running the best
\nshow and Shekhar is doing the best in Bajaj electricals. Bajaj electricals is
\none of the best electrical goods company enjoying great brand strength (one of
\nmy investments, Study posted at this blog also). So as you can see there is
\nnothing like bad managing in Bajaj group\u2026the best of them will lead the show. I
\nthink the other brothers Niraj and Madhur are associated with Bajaj Auto. So it
\nis still a close knit family\u2026true Indian joint family\u2026sharing everything among
\nthem. <\/span><\/div>\n
\n
<\/span><\/div>\n
\nThis is why I have so much faith in
\nBajaj group.<\/span><\/div>\n
\n
<\/span><\/div>\n
\n(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post.<\/span><\/span> <\/span>Reach me at oscillationss@yahoo.in<\/span>).<\/span><\/div>\n
\n<\/div>\n
\n<\/div>\n
\n<\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

Stock investing is all about value investing i.e. picking a stock at a price which is much lower than its intrinsic value (real worth). And most people think that this real worth is basically a handiwork of financial analysis which calculates Real worth of a stock based on earning growth, balance sheet strength etc. But this is just post mortem. The most important factor in the value investing formula given by Sir Benjamin Graham was not the evaluation of these financial parameters but it was the mysterious \u201cg\u201d in his formula which was the most important factor in the valuation…<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-1153","post","type-post","status-publish","format-standard","hentry","category-blog"],"_links":{"self":[{"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/posts\/1153","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/oscillations.in\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=1153"}],"version-history":[{"count":0,"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/posts\/1153\/revisions"}],"wp:attachment":[{"href":"https:\/\/oscillations.in\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=1153"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/oscillations.in\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=1153"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/oscillations.in\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=1153"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}