Munjal Auto & Gabriel India

Transcription

1 RETAIL Munjal Auto & Gabriel India Scrip Code Industry CMP Recommendation Price Target Red flag level Time Horizon Buy at CMP and add on declines between MUNAUTEQNR Auto Ancillaries Rs Rs Rs.45 band Rs and Rs.57.3 Rs Quarters Scrip Code Industry CMP Recommendation Price Target Red flag level Time Horizon Buy at CMP and add on declines between GABINDEQNR Auto Ancillaries Rs Rs Rs band Rs Rs Quarters We are broadly positive on India s Auto Ancillary industry. We expect an up tick in cyclical drivers - Auto sector-over the medium term, while the structural drivers are expected to look up over the longer term. We perceive huge growth opportunity in the automotive segment, as India is fast becoming one of the major manufacturing hub for global OEMs. With the expected up tick in the Auto sector, we are bullish on MUNJAL AUTO and GABRIEL INDIA. Industry Overview Indian auto component industry is emerging as a global manufacturing hub for auto component manufacturers and is one of the front runners for grabbing the global auto component outsourcing market, estimated to be worth US$700 billion by The industry has been navigating through a period of rapid changes with great confidence. Driven by global competition and the recent shift in focus of global automobile manufacturers, business rules are changing and liberalization has had sweeping ramifications for the industry. The Indian auto component industry is one of the few sectors in the economy that has a distinct global competitive advantage in terms of cost and quality. The value in sourcing auto components from India includes low labour cost, raw material availability, technically skilled manpower and quality assurance. An average cost advantage of nearly 25-30% has attracted several global automobile manufacturers to set base since Today, India has the potential to manufacture a range of automotive components from fasteners to engine parts. Apart from foreign demand, the domestic automomobile production is also growing. The Indian auto component industry is highly fragmented: THEMATIC AUTO ANCILLARIES March 25, 2014 Around 500 organized player s account for the 77% of the value added in the sector. Unorganized players are mainly replacement market players or tier 3/4 component manufacturers. Automotive Component Manufacturers Association of India (ACMA) represents the auto component industry in India and has around 500 registered members. Source: ACMA (Automotive Component Manufacturers Association of India), HDFC sec Research RETAIL RESEARCH Page 1

2 Industry growth drivers India is emerging as a global manufacturing hub for auto component manufacture. India is amongst the most competitive manufacturers of auto components in the world. Auto component industry in India has the potential to grow at a CAGR of 13% to reach $40 Billion by India s share in world auto components is expected to grow to over 2.5% by Domestic market projected to grow at around 8-10% per annum in the next 10 years. Exports projected to grow at over 20-30% per annum. Opportunity to address the global auto components market while leveraging India s large and growing domestic market. The growth expected in the domestic automobile industry will give a fillip to the auto component industry. The Indian automobile industry offers great potential considering the low penetration along with rising income levels and a rapidly growing middle class. These factors will see a boost in demand for vehicles, especially passenger cars and two wheelers. Exports of automobiles have also emerged as a key component of growth. Rising exports will indirectly increase the demand for Indian auto components. De regulation and the Government s policy initiatives have facilitated growth and focus has now shifted towards attracting foreign direct investments. Also, the Government s initiative towards road development will give a boost to demand for vehicles and indirectly auto components. Credit availability has always been an important demand driver for the industry especially in commercial passenger cars, commercial vehicles and in tractor segments. Hence any major positive changes in financing norms and declining interest rate cycle will directly impact demand for vehicles and components. Metal intensive components Forgings, Stampings and Castings As labour plays a important role in these, India has historically been a strong player in these segments. Skilled labour intensive components Machining, wiring harness and other electrical components. Hi tech components Electronic fuel injectors. Industry Risks and Concerns Source: ACMA (Automotive Component Manufacturers Association of India), HDFC sec Research Global / continued domestic slowdown can derail the prospects of the industry. This could impact / delay the price hikes from OEMs apart from affecting volumes. Volatility in the prices of metals and other inputs could erode the industry s cost competitiveness. Tier 1 manufacturers taking up Greenfield project overseas. Intense competition from counterparts in other emerging economies may add pressure on margins of manufacturers. Any increase in steel prices would result in pricing and margin pressures if costs are not passed on. Strengthening of Rupee could have a negative impact on the export revenues. Rising labour costs and unavailability of skilled labour could impact the competitiveness of the industry. RETAIL RESEARCH Page 2

3 Munjal Auto Industries Limited (MUNJALAU) Scrip Code Industry CMP Recommendation Sequential Targets Red flag level Time Horizon Buy at CMP and add on declines between MUNAUTEQNR Auto Ancillaries Rs Rs Rs.45 band Rs and Rs.57.3 Rs Quarters Price Chart Munjal Auto Industries Ltd., (MAIL) is a TS and ISO accredited, leading auto component manufacturing company in India producing Exhaust systems complete for two wheelers and four wheelers, Spoke rims for two wheelers, Steel Wheel Rims for Two Wheelers and Four Wheelers, Fuel Tanks for Four wheelers, Seat Frames for four wheelers and other automotive assemblies. The company has a technical collaboration with Samsung Industries Ltd. of Korea for the manufacture of Fuel Tanks for Four Wheelers. The company is among the largest manufacturer of the exhaust systems in the world, manufacturing close to 22,000 systems per day. The company produces more than 10,000 spoke rims for motorcycles and steel wheel rims every day. MAIL is a part of the famous Hero Group of companies, sporting flagship companies like Hero Moto Corp (HMCL - earlier called Hero Honda Motors) and Hero Cycles. It has three manufacturing facilities located at Waghodia in Gujarat, Bawal in Haryana and Haridwar in Uttarakhand. Investment Rationale Stock Details BSE Code NSE Code MUNJALAU Reuters Code MUAU.NS Stock Beta 0.96 Price (Rs) as on Mar 25, Equity Capital (Rs cr) 5.0 Face Value (Rs) 2.00 Market Cap (Rs cr.) Book Value (Rs) Avg. Volume (52 Week) 20, wk H/L (Rs) 48.00/24.50 Shareholding Pattern (As on Dec 31, 2013) % Holding Promoters Institutions 0.07 Non Institutions Total Wide product range MAIL is among the largest manufacturer of the exhaust systems in the world, manufacturing close to 22,000 systems per day. MAIL manufactures over 20 different models of exhaust systems complete for motorcycles and scooters. It has capability to manufacture exhaust system for four wheelers also. The wide range of MAIL s products includes electro plated and painted exhaust mufflers for motorcycles and scooters, electro plated rims for motorcycles, steel wheel rims for scooters and passenger cars, precision sheet metal parts / modules and side step assembly complete for MUVs and SUVs. It manufactures exhaust mufflers and rims for several new models in the motorcycles segment. It manufactures all types of precision sheet metal parts / components. This is its core strength area. Right from the design to production, the company offers precision sheet metal parts / components as per the customer specifications. MAIL offers a comprehensive side step assembly complete for MUVs and SUVs. MAIL is constantly working on broadening its product portfolio and is currently studying and pursuing opportunities of higher capacity motorcycles for export markets. Hero Moto Corp Esteemed Customer Hero Moto Corp is a major customer of MAIL contributing ~85-90% of its sales. HMCL is a dominant player in the Indian 2 wheeler market with a share of 46%. MAIL supplies ~75-80% of its requirements in all high-end motorcycles and 100% in case of scooters. Close to 90% of Hero MotoCorp s (HMCL) muffler requirements are met by MAIL. The company supplies to all HMCL models, except 100 cc bikes. The management of Hero Moto Corp after announcing the Q3 results stated that they are in the process of launching 4 new models in addition to the 11 refreshes and variants launched during the year. We expect Hero s market share to continue to increase going forward, might be at a slower pace due to competitive launches. With the pre-election rural spend, we expect a pickup in rural demand in Q4 and to continue in Q1 on monsoon s arrival. With scooter demand going very strong especially for Maestro (the company forfeited Pleasure capacity for Maestro which is high in demand), the company is increasing its monthly scooter capacity from 50,000 currently to 75,000 per month from this quarter. Hero is expanding its capacities from current 6.9 mn to 9.5 mn by FY at a capex close to Rs11-12 bn at new plants in Rajasthan and Gujarat. Munjal Auto will be a direct beneficiary of all these developments. RETAIL RESEARCH Page 3

4 Increased automation to reduce operating costs As the business environment gets more competitive, it is imperative to look for better ways of doing work. MAIL has gone in for various automations like robotic welding, spray phosphating, tool manufacturing to name a few. Also technical partnerships with certain expert organizations have helped MAIL to increase their operating efficiencies and reduce operating costs. Consistently rewarding shareholders MAIL has been a good dividend paying company for the past many years. It has been consistently declaring dividends that translate into a good dividend yield. For FY13 it had given 100% Dividend (Rs.2 per share) on the face value of Rs.2. Year of Dividend PAT (Rs cr) Dividend amount paid (Rs cr) % Dividend Dividend payout ratio % Indian two wheeler industry not at saturation levels In India, 2-wheelers remain a major mainstay for the daily commuting. Given the shortage of public transportation system in major cities and towns, there are no cost-effective solutions to the daily commuting. Hence 2-wheelers remain the preferred vehicle for the purpose. In rural areas also, they remain one of the major mode of conveyance to nearby urban areas. Two-wheelers retain their edge over other mode of transport due to multiple reasons, such as: Lower price tag of Rs 35k-50k. Low operating cost due to better fuel efficiency. Flexibility in maneuvering the congestion in city traffic. Rural India - a major demand driver Lower penetration levels in rural areas is another opportunity for the domestic markets and this has been one of the major reasons for stability in domestic 2-wheeler sales despite gloomy economic scenario and domestic slowdown that has mainly impacted the urban areas. Since, Hero Moto Corp is the major customer of MAIL contributing ~85-90% of its sales and HMCL being the market leader in Indian two wheeler industries, we expect MAIL is well positioned to reap the benefits going forward. Risks and Concerns Margins could be under pressure on the back of rising commodity prices. With the price of crude oil rising significantly, the price of automotive fuel is likely to face upward pressure. While increase in prices of fuel brings about some shift in auto sector from 4-wheeler to 2-wheeler continuous price increase in fuel could act as a dampener even for the 2-wheelers from which MAIL derives major part of its sales. With the unabated threat of inflation, RBI has raised its policy interest rates significantly over the last couple of years. Availability of credit and affordable interest rates are important facilitators for automobile industry and the two-wheeler segment within it. The RETAIL RESEARCH Page 4

5 recent rise in financing rates could impact demand in automobile industry across all its segments. MAIL derives majority of its sales from HMCL. However, if HMCL widens its vendor base it could affect MAIL s future profitability. The fortunes of the auto ancillary sector are closely linked to those of the auto sector. Demand swings in any of the segments (cars, two-wheelers, commercial vehicles) have an impact on auto ancillary demand. Demand is derived from original equipment manufacturers (OEM) as well as the replacement market. MAIL faces intense competition from organized and unorganized players in the sector. There are around 500 key players in auto components in the organized sector along with several unorganized players. Munjal Auto is solely depended on HMCL. Also it has so far not developed export markets for its products. In that sense MAIL s business model is not de risked. Two wheeler sales are dependent on good monsoons especially in the rural areas. It is so far into low margin sheet metal components and needs to graduate into higher technology high margin products. Conclusion & Recommendation MAIL is a fast-growing Hero Group company manufacturing superior light engineering automotive products. It has decent return ratios and healthy cash balances. At the current market price of Rs the stock is trading at 4.0x FY15E EPS. Investors could buy the stock at CMP and add on dips between Rs Rs.45 band (~3.75xFY15E EPS) for sequential targets of Rs and Rs (~4.5x and ~5.0xFY15E EPS). Quarterly Financials (Rs cr) Particulars (Rs cr) Q3FY14 Q3FY13 VAR % Q2FY14 VAR % 9MFY14 9MFY13 Net Sales Other Operating Income Other Income Total Income Total Expenditure PBIDT Interest PBDT Depreciation PBT Tax Reported Profit After Tax EPS PBIDTM (%) PATM (%) RETAIL RESEARCH Page 5

6 Quick Estimates (Rs cr) Particulars FY12 FY13 FY14E FY15E Net Sales Total Income Operating Profit Interest Depreciation Profit Before Tax Tax Reported Net Profit Adjusted Net Profit EPS OPM % PATM % Product wise details (Rs) Particulars FY12 FY13 Mufflers Motorcycle Rims Scooter wheels Other components Key Ratios Particulars (Rs cr) FY09 FY10 FY11 FY12 FY13 Debt-Equity Ratio EV/EBIDTA Technical View Technically, the stock looks attractive on charts for a short to medium term perspective. If we analyze the monthly charts, we can see that the stock after touching a high of around Rs.63 during April 2012, it had gone for a deep correction, which took it to sub Rs.27 levels. Its 200 Day EMA was also around that level. Stock consolidated in that support zone and traded range bound between Rs.27 and Rs.29 for couple of months and then started an upmove, which is still continuing. Now, the stock is trading above its 50, 100 and 200 Day EMA and it managed to break the strong resistance around Rs.41 levels. The next immediate resistances are seen around Rs.53 Rs.57 levels. Momentum oscillator RSI is currently at 57 and pointed upwards, suggesting more upside. On the downside, immediate support for the stock is seen around Rs.41 levels.. We expect the stock to continue this momentum on the upside and hit levels of of Rs.53 and Rs.57 in the next 1-2 quarters. RETAIL RESEARCH Page 6

7 Conclusion Munjal Auto looks good for a short to medium term perspective. Investors could buy the stock at the current market prices and further add on declines in the Rs.43-Rs.45 price band for sequential targets of Rs and Rs.57.30, with stop loss placed at Rs.41. RETAIL RESEARCH Page 7

8 Gabriel India (GABRIEL) Scrip Code Industry CMP Recommendation Price Target Red flag level Time Horizon Buy at CMP and add on declines between GABINDEQNR Auto Ancillaries Rs Rs Rs band Rs Rs Quarters Price Chart Stock Details BSE Code NSE Code GABRIEL Reuters Code GABR.NS Stock Beta 1.80 Price (Rs) as on Mar 25, Equity Capital (Rs cr) Face Value (Rs) 1.00 Market Cap (Rs cr.) Book Value (Rs) Avg. Volume (52 Week) 258, wk H/L (Rs) 29.60/16.05 Shareholding Pattern (As on Dec 31, 2013) % Holding Promoters Institutions 5.97 Non Institutions Total Established in 1961 with the setting up of a Shock Absorber plant at Mulund, Gabriel India is the flagship company of the Anand group. Gabriel India has product specific Technical Collaborations with KYB Corporation, Japan, KYBSE, Spain and Yamaha Motor Hydraulic System, Japan for passenger cars and two wheeler applications. KYB Japan now own a 5% stake in the Company bought from the company's erstwhile collaborator Arvin Meritor, USA.Gabriel india was originally set up in 1961 as a Joint Venture with Maremont Corporation, USA (now Gabriel Ride Control Products of ArvinMeritor Inc, USA). The company is a leading manufacturer of Ride control products i.e Shock Absorbers, McPherson Struts & Front Forks. The Ride control products are produced in its plants located at Nasik and Pune in Maharashtra; Dewas, Madhya Pradesh; Hosur, Tamilnadu, Gurgaon, Haryana and Sanand, Gujarat. Another division of the company the Engine Bearing divison, which was set up in 1978 at Parwanoo, Himachal Pradesh in collobaration with Federal-Mogul Corp, USA is an fully integrated facility to produce complete range of Bimetal Bearings, Bushes, and Thrust Washers. Gabriel commands a 45% market share in the passenger car business, 19% in the Two wheeler segment and 80% in the commercial vehicles segment. Gabriel has also been the trusted partner of the Indian Railways and the Defence segment supplying shock absorbers to them since About 14% of its saels come from aftermarket and exports while 48% of its sales come from two and three wheelers, 25% from passenger sales and the balance from CV sales. Investment Rationale Major supplier to HMSI Honda Motorcycles & Scooters India (HMSI) has inaugurated its new plant near Bangalore in May 2013, which would further drive growth for Gabriel over and above the average industry growth. Gabriel is one of the major suppliers to HMSI of both shock absorbers and front forks. HMSI thinks that the existing capacity will not be sufficient enough for the company, which aims to become number one in Indian two wheeler market by As per SIAM, Indian two wheeler market is expected to grow at 13-15% CAGR (Compounded annual growth rate) for the next five year, so, in such situation HMSI needs at least million units capacity by 2020, in order to rule Indian two wheeler market. Any major capacity expansion plans by HMSI in the future will indirectly benefit Gabriel India. Innovation and internal efficiencies could help improve performance Gabriel has started focusing sharply on innovation, reducing costs, working capital and overheads, and improving productivity. Measures have also been taken on the working-capital side because of which there has been significant improvement. Hence, Gabriel could reduce inventories and receivables going forward. Debt was also reduced by ~Rs.400m in FY13 on the back of decent profitability and lower capex needs. Two wheeler contribution on the rise Close to 50% of Gabriel s sales come in from the two wheeler segment and now since Honda s new plant near Bengaluru has commenced operation we expect this figure to rise further going forward. Four wheeler segment has been going through a period of sluggish demand due to economic slowdown and other factors like rising interest rates, Gabriel was able to offset that effect with this rising contribution from two wheeler segment. Two wheeler contribution to Gabriel s sales has increased from less than 50% in FY13 to ~55% during the H1FY14 period. Good Q3FY14 performance Net profit of Gabriel India rose 76.44% to Rs crore in the quarter ended December 2013 as against Rs 7.98 crore during the RETAIL RESEARCH Page 8

9 previous quarter ended December 2012 (after extraordinary expenses of Rs.4.79 cr). Sales rose 14.41% to Rs crore in the quarter ended December 2013 as against Rs crore during the previous quarter ended December While auto OEM demand was not very robust, the addition of customers and the better performance of the two-wheeler segment drove its performance. The replacement segment saw double-digit growth, while exports, a key focus area, was subdued due to problems in some regions. Diversified business risk profile Gabriel is India s second-largest player in the automobile suspension component industry. The company has a diversified business risk profile with presence across the OEM segment, aftermarket and exports. Furthermore, within the OEM segment, Gabriel has a diversified client profile across all automotive segments, which provides revenue stability to the company. It has also benefited from its long-standing technical tie-ups with global players, including Arvin Meritor Inc, SOQI Hydraulics Systems Co Ltd, and KYB-UMW Steering Malaysia Sdn Bhd. As shock absorbers are safety-critical products, these technical tie-ups enhance Gabriel s product development capabilities. Gabriel expects strong growth in its exports, at 40% in the next two years (on a high base after registering more than 100% growth in the two previous years). Similarly, replacement sales is another high-growth-potential segment. These two segments could constitute 25% of overall revenue in the next 2-3 years (from 14.3% currently). The company has a 300 strong dealer network covering the length and the breadth of the country. The market is further supported by 5000 retail outlets which are serviced by a highly trained Gabriel sales force. The company has been highly successful in its After market Exports and has established a strong presence in the replacement markets for the two and three wheeler segments in Sri Lanka, Bangladesh and Egypt. Improving financial performance Gabriel s financial profile has been steadily improving over time, supported by steady operational cash flows, prudent management of working capital, reduced exposure to group companies and moderate capital spending. This has enabled the company lower its debt levels, also benefiting its gearing, as well as key debt protection metrics. Gabriel is currently operating at utilization levels of 70 to 75 per cent. Gabriel had earlier provided support to the Anand group largely in the form of equity investments and inter-corporate deposits, which have been gradually reduced in the past three to four years. The company has been taking several productivity improvement and cost reduction initiatives to control costs; nevertheless, the increasing competitive intensity in the automotive component space, as well as pricing pressures exerted by the automotive OEMs, continues to render moderate susceptibility to Gabriel s operating profitability. Operating margins, which were high at % in FY10 to FY12, fell to 6.7% due to slowdown and commodity price pressures. Gabriel could see a gradual uptick in margins over the next two years as the automobile industry revives growth and commodity prices come back to earlier levels. Gabriel has a comfortable capital structure and low Debt/Equity ratio of 0.31 as on March Locational advantage Major OEMs are in clusters and scattered all over India, some prominent ones are based in Tamil Nadu, around the National capital region and in Pune. As the presence of the major OEM s is in these major clusters, auto component suppliers based near these major clusters are viewed favourably due to their proximity to OEM s, and thus the ability to ensure quicker turnaround time. Gabriel has manufacturing plants across all these major OEM s location and thus we feel Gabriel has locational advantage. RETAIL RESEARCH Page 9

10 Risks and Concerns Rising commodity prices could pose a challenge to profitability. Gabriel s sales are mostly dependent on HMSI, so any delay in HMSI s expansion plans could be negative for Gabriel. Gabriel faces intense competition from both the organized and unorganized players in the sector. The fortunes of the auto ancillary sector are closely linked to those of the auto sector. Demand swings in any of the segments (cars, two-wheelers, commercial vehicles) have an impact on auto ancillary demand. Demand is derived from original equipment manufacturers (OEM) as well as the replacement market. Gabriel being a net importer of components and raw materials is subject to foreign exchange fluctuations. Conclusion & Recommendation Gabriel has started focusing sharply on innovation, reducing costs, working capital and overheads, and improving productivity. Measures have also been taken on the working-capital side because of which there has been significant improvement. Increasing exports, addition of new customers and also strengthening of replacement market could be the key drivers. At the current market price of Rs the stock is trading at 6.75x FY15E EPS. Investors could buy the stock at CMP and add on dips between Rs Rs band (5.5x- 6.0xFY15E EPS) for a target of Rs (8.0xFY15E EPS). Quarterly Financials (Rs cr) Particulars (Rs cr) Q3FY14 Q3FY13 VAR % Q2FY14 VAR % 9MFY14 9MFY13 Net Sales Other Operating Income Other Income Total Income Total Expenditure PBIDT Interest PBT Tax Reported Profit After Tax Extra ordinary items Adj. PAT EPS PBIDTM (%) PATM (%) Production (Million Nos) Item FY07 FY08 FY09 FY10 FY11 FY12 FY13 Shock absorbers, Struts and Front forks RETAIL RESEARCH Page 10

11 Quick Estimates (Rs cr) Particulars FY11 FY12 FY13 FY14E FY15E Net Sales Total Income Operating Profit Interest Profit Before Tax Tax Reported Net Profit Adjusted Net Profit EPS OPM % PATM % Key Ratios Particulars (Rs cr) FY09 FY10 FY11 FY12 FY13 Enterprise Value FD EPS PE(x) Book Value (Rs.) P/BV (x) EBITDA (%) NPM (%) Debt-Equity EV/EBITDA Technical View Technically, the stock looks positive for a short to medium term. It had a tremendous run from 2009 to 2011 period then, it had undergone some correction. It tried to re test its previous high around Rs.37 on one or two occasions but couldn t succeed in it and that resulted in further correction. The correction took the stock price to Rs.16 levels that coincided with its 200 Day EMA as well. Stock has witnessed a strong pull back from that lows and on the way taken out its immediate resistance around Rs.20 and is now trading close to its next immediate resistance of Rs.30. Momentum oscillator RSI is at 53 levels pointing upwards suggesting more upside possible on this scrip. Immediate support for the stock are seen at Rs and Rs.23 levels, so any fall towards these support zones can be utilized for making fresh entry into the stock or for further additions. We expect the stock to continue its uptrend and expect it to hit our target of Rs.34 in the next 1-2 quarters unless the downside support of Rs.21.5 is not breached. RETAIL RESEARCH Page 11

12 Conclusion Gabriel looks good for a short to medium term perspective. Investors could buy the stock at the current market prices and further add on declines in the Rs.23-Rs price band for a target of Rs.34, with stop loss placed at Rs Analyst: Rethish Varma.S (Rethish.Varma@hdfcsec.com) RETAIL RESEARCH Tel: (022) Fax: (022) Corporate Office HDFC Securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai Phone: (022) Fax: (022) Website: hdfcsecretailresearch@hdfcsec.com Disclaimer: This document has been prepared by HDFC Securities Limited and is meant for sole use by the recipient and not for circulation. This document is not to be reported or copied or made available to others. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. The information contained herein is from sources believed reliable. We do not represent that it is accurate or complete and it should not be relied upon as such. We may have from time to time positions or options on, and buy and sell securities referred to herein. We may from time to time solicit from, or perform investment banking, or other services for, any company mentioned in this document. This report is intended for Retail Clients only and not for any other category of clients, including, but not limited to, Institutional Clients RETAIL RESEARCH Page 12