ICRA maintains valuation grading of 'A' to Nelcast

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ICRA maintains valuation grading of 'A' to Nelcast

ICRA Equity Research Service has come out with its report on Nelcast. The rating agency has maintained valuation grading of 'A' on the Company indicating, the stock is significantly under-valued on a relative basis as on the date of the grading.

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ICRA Equity Research Service has come out with its report on Nelcast . The rating agency has maintained valuation grading of 'A' on the Company indicating, the stock is significantly under-valued on a relative basis as on the date of the grading.

Despite the weakness witnessed in the Indian automotive industry during the past three quarters, Nelcast posted a healthy 39.1% growth in revenues during the first nine months of 2011-12, surpassing our 2011-12 growth estimates. A diversified customer base spread across commercial vehicle and tractor OEMs, coupled with higher realisations drove revenues. Within the commercial vehicle segment, the company's revenues are skewed towards Heavy commercial vehicles (HCVs). During the first nine months of 2011-12, M&HCV volumes grew by around 7.9% while tractor volumes grew by over 19%. Despite the slower growth in the M&HCV industry, robust demand from tractor OEMs and Nelcast's increased penetration into players like Tata motors Limited (TML), VE Commercial and Tractors & Farm Equipment Limited (TAFE) paid dividends. The company's revenue skew towards tractors has increased from around 20% to 30% during this period. Nelcast's volumes grew by 25% while blended realisations increased by over 11% during the first nine months of the current fiscal.

Margins expand on operating leverages: Nelcast's operating margins at 12.7% during the first nine months of 2011-12, is around 60 bps higher than our estimates, as the company enjoyed higher realisations and operating leverage benefits on surging revenues.

Revenue momentum to sustain in the current quarter: While the sluggish global economy continues to cast a shadow over the near term demand outlook, the final quarter of the fiscal usually witnesses heavy sales push from automotive manufacturers. Supported by the healthy order book from customers like TML, TAFE and other Tier I customers like Tata Cummins Limited (TCL) and Automotive Axles Limited (AAL), Nelcast is expected to witness healthy revenue growth in the current quarter. Steps to diversify revenue base through entry into the off-road vehicles segment with larger castings is also expected to support revenues and margins in the coming quarters. Further, Nelcast is likely to benefit from scale economies coupled with a stable raw material price regime. Although high-margin export volumes continue to be weak during the current fiscal, revival in global demand over the next two to three years is likely to buffer margins.

We revise our earnings estimates upwards maintaining our valuation grading of 'A' on the Company indicating that the stock is significantly under-valued on a relative basis as on the date of the grading.

Since our last update (October 28,2011), Nelcast's share price has risen by 27.7%, while the major indices such as CNX Nifty, BSE auto index, CNX 500 and BSE Small cap have fallen by 2.3%, 1.5%, 5.5% and 5.5% respectively. Despite this sharp appreciation, Nelcast's forward PE estimates continue to be at a significant discount to all the major indices. We expect Nelcast to bridge the gap in valuations to an extent given the expected robust earnings performance in the coming quarters, increasing inroads into key customers, addition of new customers and the long term healthy prospects for the M&HCV and tractor industries.

Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

To read the full report click on the attachment