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  • Call us: +91 9920992020
  • Mail US : techsupport@qrcia.com
  • ADD US : Dynamic Consulting
  • 4, Capri, 9 Manav Mandir Road
    Mumbai 400006, India

  • info@qrcia.in

Dear Investor,

We hope this letter finds you and your loved ones safe and well. It is indeed a relief to hopefully see the end of the pandemic.

One of the characteristics of stocks that we buy in the portfolio is what we internally call ‘Quality in a Spot of Bother’ (SoB). These are companies that meet all our quality filters on business, management integrity & capability, runway for growth and a strong track record of profitable execution. These are businesses that for reasons outside of their control or because of actions that they are taking to transform the business are going through a period of slow or low growth and hence are being disproportionately punished by the market participants who are ignoring the longer-term positive change that this pain will bring. With this background, we would like to highlight a stock that we currently own in the portfolio which fits this SoB bucket.

Jamna Auto Industries (JAI) is the largest manufacturer of suspension springs for commercial vehicles in India. Jamna, with a market share of ~70% is the largest supplier to most commercial vehicle (CV) manufacturers in India. JAI started out as a manufacturer of leaf springs in the late 1950s and has added more advanced and value-added products like parabolic springs, air suspension, lift suspension and other allied products. Springs form an integral part of the suspension system for CVs and are installed to help support the entire weight of the truck and help to ensure a smoother ride.

The CV industry is inherently a cyclical business which is highly dependent on economic activity.

Jamna over the last few years set out to try to reduce the gradient of its business cyclicality and de-risk their business by undertaking an internal program called ‘Project Lakshya 33’.

Source: Company, B&K Research

During this project, JAI permanently took out a sizeable chunk of expenses and fixed costs from their business (we estimate Rs 500-600mio). They achieved this by streamlining and modernizing manufacturing practices, cutting interest costs deleveraging their balance sheet by becoming net-cash and optimization of plants and manpower. Because of their continuous cost reduction efforts, at the end of FY20, their break-even utilization was down to < 40% and < 33% in FY20 and FY21 respectively. These efforts significantly increased their ability to weather the storm caused by the covid-19 pandemic and they were able to bounce back to profitability with only a slight recovery in the overall commercial vehicle sales.

Given that the aftermarket opportunity can be as large as supply to OEMs, JAI has significantly improved its reach and capabilities to grow aftermarket sales. They have continuously invested in technology to better manage the entire supply chain as well as build dealer connect and loyalty which will enable them to not only garner better margins but diversify their income stream and grow faster than the underlying CV sales.

Starting FY21, JAI has embarked on Lakshya 50XT, their first five-year plan with the objective to achieve future growth and to de- risk business further through market & product diversification. The FY’26 targets for Lakshya 50XT are: (1) 50% revenue from new markets with 10% revenue from new export markets; (2) 50% revenue from new products like allied suspension, machined parts, full range of trailer suspension and other products; (3) 50% return on capital employed and (4) 50% of profits distributed as dividend.

Jamna is working towards adding multiple new products which will increase their content per vehicle. This should help achieve better growth and higher margins. The management have demonstrated the ability to put a more variable cost structure in place, significantly reduce breakeven to ~25% now (from ~40% a few years ago). By funding capex through internal accruals, the company now has a robust net cash balance sheet.

Our unwavering preference and focus for quality remain intact no matter the cyclicality of the industry. We like to invest in businesses and management teams which are driven, leaders in their segment and can transform themselves in tough times. Companies which help themselves by getting into more value-added and add adjacent products with a strong balance sheet can help mitigate a downturn. We think as JAI moves towards achieving its medium-term goals, the volatility in the business can reduce further and it will emerge stronger in each subsequent cycle. Jamna is very well placed to take advantage of the CV cycle for the next few years.

Market & Performance Update

For FY22 (April 2021 to March 2022), the QRC Long Term Opportunities Portfolio (LTOP) was up 28.5%. Our 1-year return for the period January 2021 to December 2021 period was 41%. The markets have been consolidating in a range over the last six months as participants are grappling with the ever-resetting inflationary expectations and the quantum of rate hikes from the US Federal Reserve. The onset of the Russia-Ukraine war has resulted in significant jump in commodities across the board and aggravated the already persistent supply chain concerns. The March quarter saw the benchmark Nifty index gain a paltry 0.6%. while the small and mid-cap indices were down 3-4% each.

*Individual client portfolio returns may differ based on timing of their investment and specific instructions/circumstances. QRC returns are TWRR post fees & expenses. Source: BSE & NSE
*Individual client portfolio returns may differ based on timing of their investment and specific instructions/circumstances. QRC returns are TWRR post fees & expenses. Source: BSE & NSE

Portfolio Snapshot

*Individual client portfolio returns may differ based on timing of their investment and specific instructions/circumstances.

Looking Ahead

Inflation readings continue to remain elevated across the developed world which have been grappling with inflation being too low for the past decade. The war in Ukraine has only aggravated this problem with central banks globally having to deal with exacerbating supply issues and higher than anticipated inflation. The US Fed will likely accelerate their rate hike path in the near term to curb the run-away inflation. The market now expects the US policy rate to settle at 2.5% in CY22 and 3% in CY23. While inflation may continue to remain high for the next few quarters, the self-correcting nature of it means that we will eventually see a reversal from these extremely high commodity prices. Either the high inflation will result in demand contraction, or the higher prices eventually induce producers to increase production and supply which should cool prices. However, these adjustments may take a few quarters and till then, one will be likely bombarded with commentary on high inflation and cost of living. We are watchful of these developments as the transition from one regime to the next is rarely smooth and will have its share of uncertainty and volatility. We are starting to turn our attention to who the potential beneficiaries of this reversal will be and are assessing and where appropriate, will make changes to the portfolio.

We thank you for entrusting us with your money. Do feel free to reach out to us with your questions or suggestions.

 

Sincerely,

Saurabh

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