During FY16 to FY19, Jamna Auto’s profit almost doubled from Rs 72 Cr to Rs 137 Cr. The trend should have picked momentum in FY20 as it was supposed to be the best year in company’s history due to pre-buying on account of shift to BS6 which could increase truck cost by 10-20% and much awaited scrapage policy.

On the contrary, this year has turned out to be a washout with M&HCV OE production dropping as much as 40-50%. Some likely explanation of this could be 1). Removal of state check-posts after GST has reduced journey time by 20-25% which implies capacity has gone up by that extent, 2) the revised axle load norms have roughly increased capacity by another 15-20%, and 3). Overall slowdown in economy and manufacturing leading to lower goods movement, lower fleet utilization and depressed freight rates.

If the upcycle had continued for another 1-2 years, Jamna would have been a different company. The new products like lift axles, air suspension, trailer suspension, ancillary spring products, composite springs etc. would have increased content per vehicle meaningfully, while revenue share of replacement market (with 3x margins) & exports would have risen reducing business dependence on OE.

H2FY20 could still be better with finally some pre-buying emerging. Since inventory levels with dealers is low, it could translate into higher production for OE and higher sales for Jamna, however it seems to be priced in at current price.

With the benefit of hindsight, we missed opportunity to exit this at much higher levels when this position became 3x for us. However, today’s decision has to be taken at today’s price - If we remain invested at current levels, we would have to again take a much longer view and ride the entire down cycle which could last for a couple of years. We would rather exit now and deploy this capital elsewhere where we have better visibility.