Yuken: A classic turnaround story

Yuken can be considered good trickle-down of country's fundamental robustness, writes Mudar Patherya

Do you know what the Yuken Effect is?
 
It is about a company attractively equity-light, appears on the verge of doing great things, the script meanders, investors exit, the stock is sold down to the ridiculous, people refuse to touch, something happens that transforms realities and the stock achieves in a few months what people had waited for years to happen.
 
That’s the Yuken India story. A company with a barebones equity of three million shares of Rs10 each (among the last of a genre). Sold down to Rs300 last year, rebounding to a high of around Rs1,800 last week.

 

What’s the magic? What has suddenly interested people? Why are people whispering ‘Next Borosil Glass’ when they talk of this company? Here is what I have been able to decipher.
 
Yuken was born out of a technical and financial collaboration with Yuken Kogyo Co Ltd, Japan, leaders in oil hydraulic equipment. It uses hydraulics technology to make mission-critical pumps, valves, castings and cylinders. The company markets these individually and collectively through power pack solutions, addressing the processing requirement in machine tools, steel mills, power projects, plastics and mobile application industries. The result is that Yuken can be considered an attractively national proxy, a good trickle-down of the country’s fundamental robustness.

 
A number of years before, it had embarked on a well-meaning backward integration (foundry) to manufacture castings. The first unit did reasonably well. The second one struggled and it would be reasonable to say that even after years, the company is yet to turn this business around.
 
One would have written the company off but for two interesting triggers. In the past two years, the management said Enough; the Board empowered the management to divest the foundry, potentially plugging the annual drain. Then, it did something else. It said: ‘Let’s sell this factory land (Whitefield, Bengaluru) we are sitting on and move somewhere else’. And, even as it continued to state how it would strengthen its business, etc, etc, few were listening to that anymore. The fundamentals of the business were secondary; the ‘other income’ player had taken over the stage.

 
First, the implications. The foundry could plug losses by around Rs6 crore a year (my estimate); the real estate arbitrage is likely to generate Rs160 crore across three years. For a company that has remained modestly cash-positive even in the most challenging market cycles of the past few years, the big question then is what it expects to do with this staggering inflow? A buyback? Buyouts? Bumper dividend?
 
No idea. However, the fundamental reality is  with foundry losses on the way out, bumper one-time inflows beginning and the company’s core business strengthening, the frog-kiss has probably happened and a charming prince (apologies for the sexism) begun to emerge.

 
If the Indian economy trebles over the coming decade (the World Bank says so), Yuken should be able to at least quadruple annual revenue to Rs800 crore on an equity of Rs3 crore, with tonnes of cash on its books.
 
I might as well buy some of this stock and prepare for retirement. The author is a stock market writer, tracking corporate earnings and investor psychology to gauge where markets are not headed.