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Fundamental Analytical & Statistical Telegram-FAST

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ResearchReport|INDIA|11AUG2018
Fundamental Analytical & Statistical Telegram (FAST)

With continuous rise in auto industry and demand, massive growth has also been witnessed in auto ancillary complimentary goods .With a CAGR growth in terms of volume in industry of 14 -15% consistent out performance has also been recorded from the sector.
A robust growth has been recorded in passenger vehicle, commercial vehicle .Keeping in view the outperformance in terms of volume. Indian Automobile industry is expected to achieve a turnover of $300 billion by the year 2026 and will grow at a rate of CAGR 15 per cent from its current revenue of $74 billion.
Revenues generated by auto ancillary have risen from US$ 26.5 billion in FY08 to US$ 43.5 billion in FY17 at a CAGR of 5.66 per cent during FY08-17.
As per Automobile Component Manufacturers Association (ACMA) forecasts, automobile component exports from India are expected to reach US$ 70-billion by 2026 from US$ 10.9 billion in FY17. The Indian auto component industry aims to achieve US$ 200 billion in revenues by 2026.


The industry is expected to post a 13-15 per cent growth rate in FY18, on the back of robust growth in domestic passenger vehicle, commercial vehicle, tractor and two-wheeler segments.
The Governments effort to double the farmer income by 2022 will also act as a big driver for the industry.

We expect continuous growth from ancillary as well .we have listed out our top pick in the auto ancillary companies which are expected to dominate the sector over the next few financial years .The stocks are product focused and intra sector focused.
Due to continuous pressure on mid-cap the valuation looks reasonable and attractive .we are continuously tracking the mentioned stocks for a longer run .we remain to be bullish on the sector.
Mentioned stocks are our top picks from the sector and we remain to be bullish on these.

MOTHERSON SUMI: THE ANCILLARY GIANT
Motherson sumi is an industry leader, the flagship company of the
Samvardhana Motherson Group. The company JV with Sumitomo Wiring Systems and Sojitz Corporation of japan MSSL had started out as a single product (wiring harness) company, but has since expanded its product range to include polymer products (through SMP), automotive mirrors (through SMR) and elastomers. The group has four divisions namely the wiring harness (15%), polymers (52%), mirrors (28%) and others components (5%). The latest acquisition of PKC (100% owned) strengthens MSS presence in commercial vehicle wiring harness segment.
Motherson Sumi is the largest ancillary manufacturer in India India’s largest auto component maker, the Daimler deal has been a booster shot one that will help it beef up its business in North America.

The global automotive industry is at the cusp of disruption, led by mega trends in the form of (a) EVs, (b) connect cars, (c) autonomous cars, (d) shared mobility, (e) stricter emission norms, and (f) platform and vendor consolidation. These trends have the potential to disrupt the automotive supply chain and challenge incumbents. We believe, with its diverse product base and market presence, MSS is set to leverage on these trends to drive its next wave of growth.
The share saw a correction after German car manufacturer Volkswagen was charged with a penalty of $ 18 billion by the US for using device for falsifying emissions data.The stock is currently trading at 305 and at 36x of FY18 earnings.

SWOT ANALYSIS
STRENGTH:
Strong relationships with OEMs, as reflected in enjoying segment leading market share. High financial discipline resulting in disciplined capital allocation and consistently high ROE of average 30%.

WEAKNESS: The company has a debt of around 15000 crores as of FY 18th which attracts an interest burden of 410 crore (FY18).The company’s interest burden increased from 374 crore FY17 to 410 crore FY18 from the company .However sales revenue increased Up to Rs56521 crore (FY18) in comparison Rs43157 crore during FY17.we expect that the debt burden on the company shall not reflect on the PAT of the company

OPPORTUNITIES: Cross-selling potential across group companies .Given MSS's strong relationship with OEMs, scale and ability to invest, it could act as consolidator at behest of its customers

THREATS: Customer and market concentration is very high, though it is focused to reduce it under 3CX15 target. Customer and market concentration is very high, though it is focused to reduce it under 3CX15 target.
We give Motherson Sumi a ‘BUY’ rating with a target price of 410 at x37FY19 (E) EPS of 11.08 (E).

SUBROS:
Subros remains to be one of the top picks of the sector .The compressor, condenser HVAC (heating, ventilation, air conditioning) part manufacturer is the industry leader.
Experienced management and aggressive pedigree coming in from Suzuki Motors Corporation of japan and Denso Corporation makes subros an industry leader.
60% of total Ac equipment requirement of Maruti are its fulfilled BY Subros which generates 80% revenue for Subros .Top selling models coming from Maruti Baleno ,Brezza and Ignis are powered by Subros equipment .Apart from Maruti Suzuki company also supplies to Renault for KWID, M&M for KUV 100 and Tata motors for Tiago and INDIAN RAILWAYS as well.

We expect a steady CAGR in terms of product volume of about 18-20 % for FY19-20.A recovery in PV industry and strong consistent growth in bus/truck, railway, AC, radiator (supply to denso) conductors (supply to whirlpool).The company is also poised to reduce the debt burden drastically with the end to cap-ex cycle over the next two financial years.

The plant expansion for manufacturing radiators is also expected to end within the same time frame. Which must diversify the company’s product portfolio.
We forecast a robust growth in PAT of 35% (CAGR) for FY19 & FY20.

SWOT ANALYSIS:
STRENGTH:
Taking into consideration the future prospect stock is reasonably valued .The Company has captured around 60% market share in the sector, company has shown consistent outperformance over the period with interest of Maruti Suzuki and Denso Corporation in the company .We expect aggressive demand growth and R&D coming in from the company.

WEAKNESS: The share is already trading at a PE of 34.75 and an EPS of 10.09 .However we expect a decrease in debt burden in the coming years which must reflect positively on the PAT.

OPPORTUNITIES: The Company’s market share is highest from its peers it caters a wide range of companies for CV’s and PV’s Subros client are the largest players of the industry and continues to grow at the same pace.

THREATS: Concentrated customer base .Majority of revenue generated by the company comes from suppling parts to Maruti Suzuki, The revenue generation of the company might fluctuate with decrease in sales by Maruti Suzuki .Slower-than-expected turnaround in European subsidiaries
We initiate our call on Subros with a buy recommendation with a target price of Rs. 353.

LUMAX INDUSTRIES: LIGHTING THE ROAD AHEAD
Lumax industries is a market leader in automobile lighting industry. With a market share of 40-45 % on standalone basis and 60% on consolidated basis (Lumax auto technologies ltd & Lumax industries)

LED THE NEW TREND witnessing structural demand shift from halogen light to led lights Lumax has placed itself in a strong position, usage of led in place of halogen bulbs in automotive industry has been witnessed with better visibility, superior design LED automotive lighting .Moreover the government norms with introduction of BS VI norms by 2020 to induce higher usage of light-emitting diode (LED) LEDs is expected to reflect in revenue generation of the Company.
With continuous outperformance from the sector we expect an increase of 20% in revenue for FY19 (E) and 36-40% in FY 20(E).The company supplies lighting ancillaries to Maruti Suzuki, Honda Cars, HMSI, Hero Moto-Corp, Tata Motors, M&M, Toyota .However Company generates one-third of its revenue from Maruti Suzuki.

We expect the company to be debt free from Q2 FY 19.The company witnessed a robust growth of 42.5% from in sales turnover on y-o-y basis as revenue increased from 348.5 crores Q1FY18 to 496.20 crores Q1FY19 .The EBITDA increased from 26.42 crores to 41.14 crores .The PAT came in as a big surprise company reported an increase of 86.8% on Y-O-Y basis from 9.29 crore to 17.36 crore we expect a consistent outperformance from the company

SWOT ANALYSIS:
STRENGTH:
The Company has a market share of around 60% on consolidated Basis, and has a huge presence in PV’s and CV’s in four wheeler segment makes company in a dominating position in the industry
WEAKNESS: The Company generates its one-third of the revenue from Maruti Suzuki with a limited client base company has a client concentrated revenue generation model.
OPPORTUNITIES: The companies cap-ex is now focused on cost reduction .we expect the end of cap-ex cycle and debt free status of the company in FY19 .Which must reflect positively in the books on a longer run.
THREATS: The Company has a lack of presence in two wheeler sector the company does not supplies to Bajaj auto and TVS motors.
Keeping sales projecting in view. The stock is currently trading at
26.21x and at an EPS of 81.90 .we initiate a buy call on Lumax industries with a target price of Rs 2740 for FY 19 (Reco price 2166) based on 23xFY19 earning and EPS of 119.
GNA AXELS: ON PATH TO THE FUTURE
GNA axels is amongst leading manufacturers of rear axle shaft. GNA has one of the largest integrated plants of its kind in the subcontinent of Asia. The company manufactures a diverse range of rear axle shafts, other shafts and spindles for the on-highway segment .The company also deals in a diverse range of rear axle shafts and other shafts for the off-highway for agricultural tractors and machinery, forestry and construction equipment, electric carts and other specialty vehicles used in mining and defence sectors.
GNA commands more than 50% market share of domestic market share in the sector. GNA derived 79.7% of its total revenue from Rear axles in FY17.The management is planning to continue with the capex plans to expand for manufacturing axle with an expectation to control 60 % market share in the coming financial year’s .The company as of now dominates the tractor axel market with a 60% share.
In the on-highway domestic segment, GNA caters to tier-I suppliers like Dana Ltd, Automotive Axles Ltd and Meritor HVS AB. In the off-highway domestic segment it caters to marquee OEMs namely; M&M, TAFE, Escorts, John Deere and Class India Private Limited.
The management expects a growth in exports with 25-30 % in FY19 with North America and Europe.
SWOT ANALYSIS:
Strengths: The company has a 50% market share in rear axles .The company has presence in both off-highway & On-highway sector Equipment and vehicles .The company is focusing to increase its exports to north America to 25-30% of its manufacturing which shall be a big revenue generator for the company and .
Weakness: The company is not expected to be debt free FROM FY20.Interest cost for FY18 will be around 7 crore half of FY17 on total debt of ~100 crore .However debt equity ratio stood at 0.36 in Fy18 as of0.78 in FY 16
Opportunities: GNA axles has state of the art manufacturing facilities and a focus on cost reduction in future is expected to increase the margins of the company from .Moreover the axles have applications in commercial vehicles (be it light, medium or heavy), off-highway vehicles, such as agricultural tractors and machinery, and forestry and construction equipment, etc.
Threats: Debt unsustainability – They have consolidated 100 crore debt, mostly short term, in books as of FY17 (albeit this is reducing). Appreciating INR might damage companies’ revenue margins coming in from exports.
Keeping in view the company’s market share .The stock is currently trading at x16FY18 and a EPS of 25.07.We have a ‘buy’ rating on the GNA axles with the target price of Rs. 530 FY19(reco at 4s 409) based on x20FY19 and an EPS OF 27.
OUR METHODOLOGY
 We at AC Agarwal value a stock based on various business model parameter like and SOTP i.e. sum of parts analysis (In case of a diversified business modal)
 Discounted cash flow method.
 P/E multiple ratio.
 Price/book ratio.
 EV/EBITDA ratio.
 The sales projection (E) based on companies comments, sector growth and in house research.
 Looking At the sector growth.
 Valuations of the peers.
 Government policies for the sector.
 Raw material Input costs.
 Corporate legal compliance.
 Market share of the company.