Dynamatic Technologies: Golden era ahead

Ketan Pandit 18 May 2009 Dynamatic Technologies Ltd (DTL) manufactures highly engineered products for the following applications: Table 1
Current Share Price (15 May 09) BSE code BSE Group Face Value Market capitalisation DTL's products include sophisticated hydraulic Beta (since 02 Jan 07) valves and custom tailored hydraulic solutions extending from simple hydraulic pumping units to BSE stock circuit limits sophisticated marine power packs, complex Lifetime high/low

y y y y

Automotive sector Aerospace sector Agricultural Equipment Industry Construction Equipment Industry

Stock data
Rs633.75 505242 S Rs10 Rs159.00 cr 0.93 + / - 20% Rs1932.55 (18 Apr 06) / 11 Oct 02) Rs1374.00 (01 Aug 08) / 32 Jan 09) Promoters: 53.66 Institutions: 24.60 Non institutions: 21.74

aircraft ground support systems to turnkey industrial installations. It is Asia's largest and one of world's top five producers of hydraulic gear pumps (in terms of production). The company is based in Bangalore and has 8 branch offices in India DTL has the following divisions: y y y y y Dynamatic Aerospace, Bangalore Dynamatic Hydraulics, Bangalore Dynametal, Chennai JKM Automotive, Chennai Powermetric Design, Bangalore

52 week high/low Shareholding (%)

Source: BSE, Analyst Research

DTL has the following subsidiaries: y y y Dynamatic Ltd, UK JKM Global Pte Ltd, Singapore JKM Research Farm Ltd, Bangalore

The approximate contributions of the DTL's verticals to its total revenues for different periods is as follows:

Windfarm, Automobile Components and Other components have been added to DTL's portfolio after it acquired a wind farm in Coimbatore and Oldland CNC Ltd., UK (see Table 2). For the nine months ended 31 Dec 07, Hydraulics and Precision Engineering vertical was contributing the most to revenues. Now, the share has gone down 58.25% y-o-y, and the same vertical is contributing only 31.31% to the total revenues. The acquisition of Oldland CNC Ltd., UK has helped the company to a great extent as the newly acquired vertical of Automobile Components contributes to a majority of revenues. Significant events/milestones

Table 2
Timeline Milestone / Event Implication

04 Oct DTL acquires Oldland CNC Ltd., UK, a profitable high end 2008 precision engineering company, for USD16 mn

01 Sep DTL acquires a 12 MW wind farm near Coimbatore, India 2008 DTL signs MOU with Spirit Aerosystems (Europe) for a complex 03 Dec metallic precision assembly for Airbus Single Aisle (A320 family) 2007 aircraft

19 Jun DTL acquires the Hydraulic Business Division (Swindon Unit) of 2007 Sauer Danfoss Ltd, UK for USD10 mn

01 Apr DTL merges JKM Daerim Automotive Ltd with itself 2007 08 Mar DTL inaugurates The JKM Science Centre at Dynamatic Park, 2007 Peenya, Bangalore. DTL and Northrop Grumman Corporation sign an MoU 09 Feb establishing a collaborative relationship for exploring joint new 2007 business opportunities related to India's national defence requirements Dynamatic Aerospace, a division of DTL, gets the rights to 09 Feb manufacture the CBLS 2000 Practice bomb carrier for Indian and 2007 export markets with Cobham PLC and its Air Refuelling & Auxiliary Mission Equipment division 10 Feb DTL inaugurates its Aerospace division at Bangalore 2005
Source: Company website, Analyst research

DTl gets a unique state-ofthe-art aeronautical manufacturing facility, and adds Airbus UK, Boeing, GKN Aerospace, Magellan Aerospace, GE Aviation Systems, Lockheed Martin and Agusta Westland to its customers list DTL achieves 85% reduction in its monthly energy costs at its Chennai complex DTL becomes the single source strategic partner for assembly components DTL gets a global sales footprint, a world-class manufacturing facility, an excellent engineering laboratory with a large amount of IPR DTL gets access to JKM Daerim Automotive's technology DTL gets a new research centre Increase in product portfolio of DTL DTL gets access to Cobham Weapons Carriage and Release portfolio, thereby increasing its technical know-how Diversification. This business will provide synergy to DTL's current operations

Financial performance (standalone)

Table 3
Particulars Total Income (Rs. cr) PAT (Rs. cr) PAT/Total Income (%) ROCE (%) Operating Profit Ratio (%) Fixed Assets Turnover Ratio Current Ratio Net Working Capital Ratio 2006 97.05 8.70 8.97 36.59 21.41 3.19 1.45 0.21 2007 115.97 9.98 8.61 36.86 20.25 2.93 1.59 0.38 2008 282.73 18.57 6.57 27.68 18.62 1.89 1.45 0.21 9 months 9 months ended 31 Dec ended 31 Dec 07 08 92.86 238.43 6.68 4.32 7.19 1.81 18.56 17.55 -

Source: Company annual reports, BSE, Analyst research Note: EBITDA has been taken into account while calculating Operating Profit Ratio

From FY06 to FY08, Total Income and PAT have increased by a CAGR of 70.68% and 46.09% respectively. The reason for the 143.79% y-o-y rise in total income for FY08 is because income from manufactured goods for FY08 rose by a whopping 152.10% y-o-y. This is because DTL started production of aircraft components (MOU with Spirit Aerosystems) and water pumps (acquisition of Sauer Danfoss) during FY08. The Return on Capital Employed has fallen by 24.90% y-o-y in FY08 because of a huge 282.30% y-o-y rise in Net Fixed Assets. During the year, since DTL merged JKM Daerim Automotive Ltd with itself, DTL spent Rs57.55 cr on JKM's assets. Further, new fixed assets worth Rs40.08 cr were purchased. The Net Profit Margin for 9 months ended 31 Dec 08 has fallen compared to the same period last year because DTL suffered a forex loss of Rs10.09 cr during the period unlike a forex gain of Rs1.18 cr during the same period last year.

SWOT analysis Table 4 Strengths Weaknesses Asia's largest and one of world's top five y Currently as high as 29% of DTL's total raw material requirement is imported. Increasing producers of hydraulic gear pumps dependence on imports for raw material is y DTL has the largest infrastructure in the Indian dangerous especially when the rupee is weak private sector for the manufacture of exacting air frame structures and precision aerospace y Aluminium requirement is too high. Over 50% of the raw materials used by DTL - extrusions, alloys components and castings - comprise aluminum y DTL's esteemed clientele include global giants like John Deere, New Holland, Indian Army, Caterpillar, JCB, Airbus etc
y

Has a variety of certifications to its credit like AS 9100, TS 16949, ISO 14001 and ISO 9001
y

The acquisition of a wind farm near Coimbatore will help DTL achieve 85% reduction in monthly energy costs at its Chennai complex Opportunities Threats yValue engineering - reduction of raw material y Rise in aluminum prices consumption by optimizing product design y Depreciation of the Indian Rupee, leading to a yAdding helicopter manufacturers to its clientele rise in import bill of raw materials
y

The ongoing slowdown has led to a fall in demand for capital goods. This may hamper DTL's product sales
y

Source:Company annual report

Valuation and recommendation The following chart shows the closing price movements of DTL from 15 Jan 07 to 15 May 09:

Source:Analyst Research

The following chart shows the closing price movements of DTL and the Sensex, both rebased on a scale of 100 during the same period:

Source:Analyst Research

The price of DTL is highly correlated to the Sensex. However, the stock has consistently underperformed the Sensex since Oct 07. The following table analyses the current returns to an investor, if the stock was purchased at different periods of time. Table 5
Stock bought Opening price on that day (Rs.) Beginning of 2007 (02 Jan 07) 1399.95 A year ago (15 May 08) 1100.00 A month ago (15 Apr 09) 520.00 A week ago (08 May 09) 562.00
Source:ValueNotes Research

% returns today (15 May 2009) -54.73 -42.39 21.88 12.77

The comparison of DTL with its peers is as shown: Table 6

Company P/E ratio 11.90 3.52 2.53

DTL
Yuken India Bemco Hydraulics
Note: Trailing twelve months (TTM) EPS has been taken to calculate P/E ratios Source: ValueNotes Research

The stock is currently trading at its 6-month low. DTL's revenues come from a variety of sectors. Even if one sector experiences a slowdown, the revenues may flow from the other sectors. DTL's Total Income and PAT for FY09 are expected to shoot on a y-o-y basis due to the benefits from the recent acquisition of Oldland CNC Ltd., UK. As reported by the company, it expects consolidated revenues of USD44 mn (Rs220 cr) over the next 4 years. So, the

immediate prospects of the company appear attractive. The company is expected to declare its FY09 results on or before 30 June 09. Keeping all the above factors in mind, I recommend a "buy" on this stock at current levels for the short term (3 months)

Dynamatic Technologies bags 3 Industrial Defence Production Licences

Written by James Tuesday, 13 April 2010

Bangalore: Dynamatic Technologies has received three industrial defence production licences from the Ministry of Commerce & Industry, Government of India. The industrial defence licences have been granted subsequent to clearances from the Ministry of Defence and Ministry of Home Affairs. The licences are for the Industrial Production of Heavy Vehicles such as Battle Tanks, Land Systems and SubSystems, and for the manufacture of two defense products - Distribution Mechanism & Hydraulic Coupling which are fitted on Heavy Armoured Vehicles. Dynamatic has also received a licence to manufacture Aircraft parts and accessories. This month the company also handed over the first prototype of the Mobile Surveillance Vehicle, the Dynamatic Rakshak, to one of Indias national security forces for field trials at an undisclosed location along the nations border. Securing these licenses, will enable Dynamatic to consolidate on it's position as a partner to the Ministry of Defence and other defence agencies in the country. The Dynamatic Rakshak is equipped with a sophisticated surveillance system to monitor infiltration on the Countrys borders, and also is capable of providing real-time Visual Intelligence within Cities. Dynamatic has been involved in the development of precision engineering components, assemblies and systems for Indias Defence Industry, and has received numerous awards in recognition of its efforts.

Dynamatic teams up with BlueBird Aero Systems for Tactical UAVs

Written by James Wednesday, 21 April 2010

Bangalore: Dynamatic Technologies Limited has inked a teaming agreement with BlueBird Aero Systems Limited, Israel, for the manufacturing, assembly and marketing of Mini and Micro Tactical Unmanned Aerial Vehicles (UAVs) in India. BlueBird Aero Systems Limited designs, develops and manufactures tactical UAV solutions and offers a range of combat-proven UAS products and technologies. The "Teaming Agreement", which was signed on 19th April, 2010, positions the Dynamatic-BlueBird partnership to emerge as a dominant player in the Indian market for tactical UAVs. The agreement enables Dynamatic to collaborate with potential customers like India's National Defence Forces, Homeland Security Forces, Police and Civilian Agencies by providing off-the-shelf combat proven and customised solutions for gathering real-time visual intelligence in remote and hostile environments, as well as real time monitoring and mapping capabilities for civilian applications.

Dynamatic Aerospace inks Deal with Boeing to manufacture Cabinets for P8I
Written by Ganesh Saturday, 20 March 2010

Bangalore : Dynamatic Technologies has signed a Contract with Boeing for the manufacture of Cabinets to house critical Power & Mission Equipment for the P8I program. Dynamatic and Boeing are working towards having the First Article ready for inspection by October 2010. Dynamatic Aerospace has received the Boeing Quality Management System (BQMS) Approval, and, is now a Boeing Approved Supplier. This is the first instance of the Company receiving a direct order from Boeing, and hence is significant for Dynamatic. The Contract for the manufacture of these cabinets was signed on 19th March 2010. The BQMS approval which automatically grants Dynamatic entry into the Boeing Approved Supplier List (ASL), was conferred upon Dynamatic Aerospace on the basis of the recognition documentation from UL DQS Inc which the division had submitted to Boeing. Dynamatic is already an Airbus Approved Supplier, and now, with the BQMS approval in hand, the Aerospace division of Dynamatic is now positioned to further augment its position in the Indian private sector by collaborating

with International Aerospace majors on exports initiatives. At the Annual Business Plan Meeting of the Hydraulics division of Dynamatic Technologies, which was held on 13th March 2010 in Bangalore, young managers who had participated in independent brain-storming sessions, presented their suggestions and ideas for improving various aspects of the business including operational efficiency, quality and corporate image. Stating that the company was at the threshold of great change, Udayant Malhoutra, CEO said that Dynamatic is poised for a giant growth leap. "To make this leap successfully, we will be required alter our propensity to think conventionally as well as the traditional beliefs about gender roles and hierarchy," he said. On 13th March 2010, Dynamatic Hydraulics conducted its Vendor Meet in Bangalore, which witnessed participation from almost 90 vendors from across South India. Dynamatic Technologies also released its Supplier Quality Management (SQM) Manual at the Vendor Meet. "The SQM booklet links the Dynamatic suppliers to its customers and channelizes the flow of information in the supply chain," said P S Ramesh, COO Dynamatic Hydraulics. The Vendor Meet concluded with the presentation of the Best Vendor Awards, which was awarded to twenty suppliers across three categories. V Rajendran, the Managing Director of V.R.Foundries was given the the Dynamatic Lifetime Recognition Award. * The P8I is a maritime surveillance aircraft from Boeing, customized for the Indian Navy, for which the Ministry of Defence in India has placed an order on Boeing.

Dynamatic Technologies acquires UK based Aeronautic Company for USD 16 mn

Written by Viswanath Tuesday, 07 October 2008

Bangalore: Dynamatic Technologies Ltd has announced that it has acquired a UK-based Aeronautic Company manufacturing highly engineered components and toolings. The said Company has been in business for the last 35 years, and specializes in complex 5-Axis machining. The acquired Company is profitable, and the acquisition was made for a total consideration of approximately USD 16 million. The acquisition Gives Dynamatic a direct relationship with major Western Aerospace Companies and provides the Company 100% ownership of one of finest 5-Axis Aeronautic machine shops in the Western hemisphere. The customers of the Company include Airbus, Boeing, GKN Aerospace, Magellan Aerospace, GE Aviation Systems, Lockheed Martin and Agusta Westland. The Company is strategically located very close to production sites of its customers, at Bristol, UK. With this acquisition, Dynamatic will get access to cutting edge technology in aerospace toolings, fixtures and programming and various other benefits to the Company in the long run. Additionally Dynamatic will get access to an Experienced management team. This acquisition broadens Dynamatic's aerospace capabilities at a time when Indian Defence & Civilian Aerospace requirements are taking off.