Movers & shakers in the auto ancillary space

Excerpts from Midcap Radar on CNBC-TV18 Watch the full show » RELATED NEWS Passenger car sales to be strong: Prabhudas Lilladher Still good amount of steam left in midcap stocks ALSO READ See what other experts are saying about markets See what FIIs are saying about the markets See what Udayan Mukherjee is saying about the markets Nifty BSE | NSE 25/05/12 Are Mutual Funds betting on Nifty? Other Stocks in this news Motherson Sumi Systems | Rico Auto | Sona Koyo Steering Systems | Maruti Suzuki India | Everest Kanto Cylinder |

Mahantesh Sabarad of Prabhudas Lilladher says that he is bullish on the auto ancillary space and sees a positive trend in Motherson Sumi, Rico Auto, Sona Koyo & Everest Kanto.

Excerpts from CNBC - TV18's exclusive interview with Mahantesh Sabarad:

Q: Motherson Sumi  came out with very strong set of numbers yesterday, what is your projection for it?

A: I am looking at Motherson Sumi to grow something close to 30% plus on the topline and little over on the bottomline front. The upside will of course come from the export potential from their domestic visibility front.

Q: What is your target that you are quoting at Motherson Sumi now?

A: Currently we have a market performer rating on the stock and the results of Q2 have actually been on to our estimates.So that leaves us with little room for any upgradation on the stock. For the last three months its been moving flat and if you look at the stock performance we believe that it will do a little catching up from here on.

Q: How do you read into the counter of Sona Koyo Steering  because they have a huge capex plan in place but have raised substantial debt and money through the rights issue as well?

A: Yes, they are outlining a Rs 400 crore capex programme and Rs 100 crore have already been raised in the form of preferential allotment. This has meant that they are right on track in terms of their capacity additions. They are looking at good visibility coming from two of their major customers, Maruti and Hyundai, who in turn are virtually putting up plants, which are coming up very fast.

Q: Give us your call on Everest Kanto  ? It's a cylinder maker, no real competition for this one. Are you betting on CNG picking up to boost profits here. It stands at Rs 472 and you have a target of Rs 600?

A: Yes, it's a quasi ancillary and the growth is currently being driven by the demand for CNG cylinders in automobile applications, primarily coming from conversions. That means the weak set of vehicles are getting converted and that's happening in parts of Gujarat, Delhi and again picking up in Delhi. We are going to see CNG penetration happening even in towns like Vijayawada, Hyderabad, Kanpur and Pune to name just a few.

This kind of growth will mean Everest Kanto will be able to capture almost the entire growth. They might give 75% in terms of market share in India. Plus substantial revenues and profits also accrue to them from their supplies to Pakistan and Middle East market through their Dubai plant which is also in the phase of expansion. 

Currently they have something like a 700,000 (seven hundred thousand) cylinder manufacturing unit capacity to which they are steadily adding. They are putting up another 100,000 (hundred thousand) cylinder manufacturing unit capacity in Dubai. They are putting up a huge capacity of one and a half million (1.5 million) cylinders per annum in China. That's of course a little longish term but for now they have raised adequate fund. They have recently added preferential allotment where they raised the equity rate of Rs 485 per share and they are working on their capacity additions and plus the demand is very strong.

Q: What is your reading into Rico Auto because clearly the company has majority of its revenue coming in from Hero Honda , margins had been under pressure but they have set out an impressive export target?

A: They have an impressive export target but we suspect that they won't be able to meet it soon. What's disappointing on Rico's front is that if you look at Q2 results, not much growth in topline, just 14%. Infact a decline in bottomline followed by sequential as well as YoY EBITDA margin contraction.

Much of their revenues come from aluminium castings and of course machining. Also we all know aluminium prices have zoomed very much which has hurt Rico.

Q: Give us your idea of where do you expect this stock to end up, say within medium to long-term. You have an underperformer call on this one at Rs 68?

A: Yes, I have an underperformer rating on the stock, which tells that we are looking at price coming down further because we are not seeing relief being offered to Rico in terms of their cost increases. Plus in terms of additional capacities coming up they are of course going to go where Hero Honda is and Hero Honda is going to Haridwar. That plant is going to come up sometime next June and Rico will follow. But initially, it will be a machining kind of centre out there before they put up the foundries. So it's going to be some time before those revenues will start accruing in favour of Rico. So till that point of time we believe the stock will continue to underperform.

Q: Any disclosures?

A: I personally don't hold any stocks but we do keep talking about recommending some of these stocks to our clients, infact all of them.