Buy Automobile Corp Goa; target of Rs 585: Sushil Finance

Sushil Finance report on Automobile Corporation of Goa:

"We recently met the management of Automobile Corporation of Goa (ACGL) and visited their Goa facilities and have come back quite impressed. Based on our discussions with the management, we believe the company is poised to deliver stupendous growth in the coming years."

"ACGL is one the largest bus body builder in India. In light of the huge surface transport projects being undertaken across India the company expects huge demand going forward from the Indian domestic market. Given the fragmented nature of Bus body building industry and the fact that ACGL is the largest organized player, it is expected to be a major beneficiary of the strong demand growth currently being experienced in the industry."

"ACGL caters to the most of the bus body requirement of Tata Motors buses for exports. Tata Motors’ (TML) demand for buses is expected to be more than 20,000 buses per annum. The company has started manufacturing several new models for TML like Tata Globus, Starbus and Star Skool. Significant increase in the CAPEX cycle in Middle East, emergence of African markets coupled with demand for CKD kits will ensure robust demand for the division."

"The Company is working closely with Hispano (where TML has about 21% equity stake) to use Hispano’s technology to build buses for the Indian markets which will help ACGL to upgrade its technology and help it build larger / higher end buses."

"Given the huge demand of Tata Motors, we expect ACGL to increase its capacity to 10,000 buses per annum over the next 2-3 years. During FY2006, ACGL’s production increased by 82% to 3004 buses, which is expected to further increase to 4000 buses in FY2007 & to 5000 buses in FY2008. ACGL has announced its plans to raise a sum not exceeding Rs 750 million to fund its CAPEX plan through a rights issue which is expected to come by the end of FY2007. The company is also expected to incur expenditure for shifting of lines of sheet metal division to a new facility in Pune."

Valuation

"We expect ACGL to report net sales growth of 35.4% and 20.2% to Rs. 3439.3 million and Rs. 4132.9 million in FY2007E and FY2008E respectively. We expect the company to report APAT growth of 38.5% & 23.6% to Rs 211.6 million & 261.6 million in FY2007E & 2008E respectively. The current price of Rs 383 discounts FY2007E and FY2008E Earnings of Rs 42.8 and Rs 52.9 by 8.9x & 7.2x respectively. We retain our Buy rating with a price target of Rs 585 on the stock, at which the stock will quote at PE 11x and EV/Cash Profit 10."