EQUITY RESEARCH: Pix Transmission Ltd.

Pix Transmissions Ltd manufactures and sells belts and associated mechanical power transmissions merchandise in India. The enterprise gives ribbed/poly-V, timing/synchronous, banded, car, industrial, special construction, agriculture, garden and lawn, and V-belts; and PowerWare products, which include pulleys, couplings, bespokes, and tensioners and idler pulleys, in addition to add-ons, which includes service kits, pulley and profile gauges, laser guided pulley alignment tools, belt length measurers, tension meters, poly-v belt wear gauges, timing belt gauges, and X'slit belt cutting gear. Its merchandise used in business, ceramic, cement, oil and gasoline, electricity plant, wooden, automotive, cold garage, entertainment and sport, packaging, rice/flour mills, building and construction, agriculture, meals processing, system gear, paper pulp, metal, lawn and garden, domestic equipment, mineral ore mining, pharmaceutical, and textile industries. It also exports its products. Pix Transmissions Ltd become integrated in 1981 and is based totally in Mumbai, India.

ABOUT:

Pix Transmissions Ltd. (PIX), a prestigious company founded in 1981, manufactures, exports, and supplies a wide range of belts and associated mechanical transmission goods, such as rubber V-belts, cut edge belts, ribbed belts, synchronous belts, and timing belts. Belts made of synthetic rubber are PIX's main product line for a variety of end markets. While there are a few smaller regional players, JK Fenner India is the primary local rival for PIX. The agri-related belt market is heavily dominated by PIX. In and around Nagpur, PIX operates four cutting-edge belt production facilities and a fully automated rubber mixing facility. In the field of power transmission, it has a very strong local and international presence and tremendous brand equity. In addition to having over 250 dedicated channel partners in more than 100 different countries worldwide, the company also operates abroad subsidiaries in Europe and the Middle East. Industrial belts, automotive belts, and agricultural belts are the available products. These goods are produced utilizing top-quality raw materials in accordance with international quality standards. Many industrial applications make heavy use of these items. Additionally, PIX offers product modification in accordance with customer needs. PIX has backed its goods by constructing an amazing support infrastructure in various important countries throughout the world, including the UK, Germany, and the UAE, keeping in mind its international consumers. Industrial V-Belts, Automotive Belts, Agricultural Belts, Special Construction Belts, Taper Lock Pulleys, Bushes, and Couplings are just a few of the products that PIX makes to fit a variety of applications. To sell PIX products in the Middle Eastern markets, PIX Middle East FZC was established. To conduct business with PIX items and other items in the markets of European nations, PIX Transmissions Europe Limited was established. A subsidiary of PIX Middle East FZC, PIX Middle East Trading LLC, UAE was set up to market PIX products in Middle Eastern nations. Germany-based PIX Germany GmbH Incorporated to conduct business for PIX Products and other products in the market of European Countries is PIX Germany GmbH, a subsidiary of PIX Transmissions Europe Limited.

SHAREHOLDING PATTERN

FINANCIALS

For Q1FY24, the company delivered muted financial results. Revenue decreased 7.1% YoY to Rs 112cr, mostly as a result of destocking and a slowdown in the export market. However, a slight increase in EBITDA to Rs 25 crore and a reduction in staff costs led to a 171 bps increase in EBITDA margin to 22.6%. PAT decreased by 10.5% to Rs. 16cr. while other income significantly decreased. PAT margin decreased to 14.2% by 54 bps.

KEY TRIGGER

Cooling raw material prices to aid margin expansion

Given the diminishing global demand for the product, prices for natural rubber, a crucial raw material for the business, have corrected sharply from the prior year and are not expected to rise any time soon. As a result of the anticipated surplus production, which is then forecast to boost NR imports into India, the worldwide NR prices are predicted to remain low in 2023. The Association of Natural Rubber Producing Countries (ANRPC) predicted that NR output will increase 2.7 percent to 14.916 million tonne in its revised outlook released early this year. It predicts a 0.4 percent decline in demand, or 14.912 million tonne. In order to cover the increasing cost of raw materials, PIX raised prices last year. Despite decreasing costs for basic materials, the management said at the AGM that it would not be lowering pricing. The corporation will probably see increased gross margins as a result of this.

Supplying belts to large MNCs for washing machines

The Washing Machines segment in India is anticipated to increase by 7.46% (2023-2028), with a market value of US$5.89bn in 2028, according to Statista Market Forecast. Many of the MNC washing machine manufacturers that dominate the Indian market have been receiving belts from PIX. The growing popularity of washing machines may work in PIX's favor.

Sufficient spare capacity to meet increased demand over next 2-3 years

In FY23, PIX finished the expansion at its MIDC factory. After the expansion, the business will have enough extra capacity to sustain its growth for the following two to three years. The company's current capacity utilization was about 60%, and its units can sustain revenues of Rs 800-900cr. As a result, the medium-term capex requirement is probably going to be low.

Exports can be a huge game changer

60% of PIX's income comes from exports. The US market is enormous, and PIX has made some significant progress there. Despite having a negligible presence in the majority of export markets, the company is progressively developing its brand. It exports to 100 different nations. In addition to the US, PIX serves a diverse international consumer base.  The company has built an amazing support infrastructure for its products in numerous important global markets, including the UK, Germany, and the UAE. Each of these places has a distribution center that can offer logistical, commercial, and technological help. In its industry, PIX may be the only Indian company to demonstrate such high levels of infrastructure support outside of the country. Gates Industrial Corporation plc (NYSE:GTES), which is much bigger than PIX, is the company that competes with PIX the most globally.

Strong financials

Despite the economic slump, PIX has been able to increase its revenues, indicating that there is a high demand for its products. In the past five years, from FY18 to FY23, the company's revenue and profit increased at a CAGR of 13/24% and CAGR, respectively. The business is still putting a lot of effort towards automation, which will probably result in fewer people and greater efficiency moving forward. The overall gearing of 0.2x in FY23 (0.3x in FY22) demonstrates the comfort of PIX's capital structure as a whole.

RISKS AND CONCERNS

• Domestic/Global slowdown: Any sustained downturn in the domestic or global economy could have an effect on the company's ability to grow.
• Raw material price volatility: The two main raw materials used in the production of rubber V-belts, rubber and rayon, account for a sizeable portion of PIX's overall raw material expenses. Depending on the supply and demand scenario, these commodities' prices continue to fluctuate.
• High working capital needs PIX provides to a variety of businesses, each with its own set of requirements. As a result, it maintains a large amount of inventory and has approximately 30,000 SKUs.
• Technology obsolescence As technology advances, many businesses are attempting to use fewer moving parts and rely more on computer technology. The overall demand for belts may be impacted by this. It's possible that some machines' newer versions won't use v-belts at all and will instead use couplings (cup links). The demand for the company's products could be impacted by this. But in some ranges, PIX manufactures couplings. While some machines are more expensive to purchase but have lower operating expenses since no replacement is required, machines that use V-belts are more expensive to purchase.
• Forex fluctuations The corporation is subject to the whims of currency changes as around 60% of its sales come from export markets. However, PIX has a partial natural hedge because it is a net exporter of commodities and imports about 40% of the raw resources it buys.

VALUATION

Pix Transmission Ltd. (PIX) produces a wide variety of belts for a number of industries, some of which have promising future growth prospects. Additionally, it exports its goods to more than 100 nations. Since belts are an essential part of every machinery, extensive R&D is needed to produce goods that are both robust and long-lasting. Being fully backward integrated gives the business an advantage because it allows it to manage margins and product quality. To satisfy the rising demand for Pix Belts around the world, PIX has increased its production and is focusing on value-added goods, which will also increase operating leverage and margins. The company should be able to achieve stronger margins thanks to the pass-through of earlier raw material inflation, automation efforts, and reasonable capital expenditures. Recent results have been impacted by the downturn in exports, and stronger exports may be possible when western economies improve. With a stronger emphasis on the after-market area, PIX continues to primarily serve the industrial market.  Growth sustainability for PIX's product in the market has been made possible by the industry's replacement activities of machinery and the acceleration of capex across the industrial segment. The company has good cash flows and a modest need for capital expenditures, and is net debt free. We expect Pix transmission to hit 1400 in 1-2 quarters. 

Sources:

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