10 April 2020

Frontier Springs Ltd Stock Analysis

Frontier Springs Ltd. is a Kanpur based company that manufactures coil springs, primarily for the railways. The springs are majorly used in the manufacture of the LHB coaches (Link Hofmann Busch) that are now replacing the ICF coaches (Integral Coach Factory). The promoter group is the Bhatia family, which owns a 51.76% stake in the company. The company's revenues depend on the tenders floated by the Indian Railways.

Business Overview

India has been using the ICF coaches since the 1950s and from 2000s, the LHB coaches started replacing the ICF coaches on selective premium trains. The LHB coaches are safer as they don't topple after an accident, thus resulting in fewer deaths from train accidents. These coaches are also lighter and have a higher speed than their ICF counterparts. The BJP led Government took a decision in 2016 to replace all ICF coaches with the LHB coaches and in 2017 it decided the manufacture the LHB coaches in India itself, under the Make in India initiative.

The ICF coaches can travel at an average speed of 110 KPMH vs the LHB coach's 160 KPMH (Tested upto 200 KPMH). Between 2011 and 2017, nearly 4020 LHB coaches were manufactured while in 2017 and 2018 a total of 5500 LHB coaches were manufactured. The faster pace of manufacturing coaches was also because of removing bottle necks by giving each department more independence.

Financial Snapshot

Frontier Spring's financial performance has taken a leap after the LHB coach manufacturing increased. The other boost was the decision to stop imports of these coaches. We can see the drastic improvement in performance between FY16 and FY20.
Rapid rise in revenues and profits

The revenue has grown at a 3Y CAGR of 30.06% till FY20. The PAT margin improved from 4.63% in FY14 to 11.97% in FY20 (TTM). Along with an improvement in growth, there has been an improvement in efficiency and return ratios too. The ROE has expanded from 7.59% to 24.9%. The debtor days have reduced from 102 days to 50 days because of which the working capital requirement has come down from 38.1% in FY14 to 16.1% in FY20.

Over the last 10 years, the company has generated a PAT of Rs 29.5 Crores while the cash flow from operations has been Rs 43 Crores. The company has spent Rs 37 Crores in Capex and has paid a dividend of Rs 6.3 Crores. Although the debt has gone up from Rs 4.6 Crores in FY10 to Rs 8.86 Crores in FY19, the debt equity ratio is relatively low at 0.23x and the interest coverage ratio is at a comfortable 11.12 (FY19).

Corporate Governance

In the micro cap companies, we have seen that the promoters take away a large pie of profits in form of salaries to family members, interest payment on loans, related party transactions, etc. In the case of Frontier Springs, we have observed the same. Some issues that are red flags:
  • A company called Vishpa Rail Equipments appears in the top 10 shareholders. However, it is not categorized as a promoter company despite a director of FSL holding additional directorship in VRE.
  • VRE also has given a loan to FSL and FSL has repaid it in FY19. The interest rate is > 10%
  • VRE has provided job work services worth Rs 2.21 Crores
  • There are other related party transactions to the tune of ~ Rs 12.8 Crores in sales and ~ Rs 14 Crores in purchases. However, there is no evidence that these purchases and sales have been on unfavorable terms to FSL. These transactions are also < 15% of the top-line numbers.
  • The promoter have also provided loans to the company at high rates of interest (> 10% p.a.)
  • The managerial remuneration exceeds the 11% of profits ceiling provided by The Companies Act.


The revenue growth visibility is high as the production of LHB coaches increases over the next few years. The stock currently trades at very cheap valuations.

Once the ICF to LHB shift is finished, the company's revenue growth will cool off as the number of coaches being manufactured will go down too. The budget of the Indian railways also depends on the policies of the ruling Government. However, the next 3-4 years for the company look bright.

As a retail shareholder, the high remuneration the directors and other payments made to the promoter family raise a big red flag on the corporate governance. Thus I would give this stock a miss from a long term investment perspective. This doesn't qualify as a buy and forget stock.

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