Why DOMS and Inox are sizzling?
The share market is a culmination of emotions as well as fundamentals. However, generally, its expectations about fundamentals that create different emotions. So we can say that ultimately fundamentals drive the market. Currently, three IPOs are open for subscription and two out of them are garnering massive response in the market. They are DOMS and INOX. Let’s unravel the business model of both companies and identify their sources of core competency.
Now, even though Hindustan Pencil may try to mimic this but it is already producing a product in a certain style and sometimes changing the product is difficult due to cultural reasons in the company or infrastructural investment.
Also, DOMS has just 30% revenue from its main business while all its peers have more than 60% share. Meaning the company is more diversified.
Despite maintaining such ROCE the company has doubled the revenues from Rs 654 crore in FY20 to Rs 1211 crore in FY23 (Faster than peers). As a result, even though company has P/E of 43.19 while average P/E is 36, the company is commanding more than 60% premium in grey market.
Although there are some concerns for the company. Its capacity utilization rate has shot up in recent years and in various products it is above 90% in FY23. You might say it’s a good news and company will exapand but that’s where things get tricky. If company will expand just organically then it will take some time and that can impact the growth. In order to expand quickly it may need to outsource the production or make some acquisitions. Outsourcing can lead to concern on quality assurance as well as possibility of loosing some core competency. Meanwhile acquisition may bring up cultural issue. This is in light when FILA (Global Brand) is decreasing its stake in the company from 51% to 30% post IPO. Implying that going ahead DOMS may get lower support from FILA on magerial front as well on technical know how. So, keep track of how DOMS will handle managerial issues as there will be some changes on ownership.
The company makes equipment for cryogenic gases. Now what is cryogenic gases? There are some industrial gases like nitrogen, oxygen and argon which are used for manufacturing various products in industries like oil & gas, petrochemicals, pharmaceuticals etc. Now if you cool these gases in liquid form then you can store a lot of gas in a very small container. However, the melting point of each gas is different but it is bellow (-150°C). Hence you need specialized containers for storing gas in liquid forms.
Inox specializes in making these equipment and that is the main value driver of the company. It is leading Indian company in the business and also a major player on the global level.
Although it may have a dominant position in the domestic market but it faces competitive force from its customers. The company has 1,255 domestic customers and 254 global customers but top 10 customers account for 50% of revenue. Now they are major players in their industry and if they know that Inox has huge dependency on them they might use it in negotiations for better contracts. However, cryogenic equipments are quite complex but very crucial for the customers. So they want reliable player that make quality products. Given that Inox has reputation of making quality products the customer prefer to stick with them. That’s why five out of the top 10 customers are repeat customers which indicates consumer stickiness. This has provided strong sustainable business Moat for INOX. Which is reflected in ROCE of 36.53%. While maintaining this ROCE, in last 2 years it’s revenues have grown from close to Rs 600 crore to more than Rs 950 crore.
Also given that the market doesn’t have any listed peers these qualitative factors have a much higher weight in P/E ratio. So, even though as per FY23 EPS, INOX has P/E of 39.22 the company is trading in grey market with a premium of more than 60%.
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