Buy CEBBCO; target of Rs 123: Sushil Finance

Sushil Finance is bullish on Commercial Engineers and Body Builders Co (CEBBCO) and has recommended buy rating on the stock with a target of Rs 123 in its October 31, 2012 research reports.

“Incorporated in September 1979, CEBBCO is the largest player in India’s non-passenger FBV (Fully Built Vehicles) segment. CEBBCO’s expertise comprises design, body building, fabrication and motion technology. It also caters to the entire railway rolling stock and Power structurals segments. CEBBCO is the largest player in India’s outsourced body building organized (MHCVs & LCVs) market with a market share of ~35-40% in a segment worth ~Rs. 1100 Cr as on FY12. It is a preferred vendor by all major OEMs. It has extensive product portfolio of more than 400 approved products which gives the company a diversified revenue stream and reduces the risk associated with the cyclicality of the CV sector.”

“In India, FBV’s penetration is only 20% of the total (MHCVs & LCVs) market as on FY12 while the rest is sold as chassis to customers, who then get the body built from the unorganized players (Garages). We believe this market is gradually shifting towards FBV and expect its penetration to increase to ~35-40% by FY14. This shift will be driven by OEMs and customers as it implies better revenues & margins for OEMs while for customers, it implies better quality & efficiency, higher payloads due to lighter weight, reduction in lead time, warranty of 18 months, full funding on FBV & 2% excise duty benefit. The management expects 80% FBV penetration by FY17 and believes that OEM’s stated policy is to convert to 100% FBV by FY17. We believe CEBBCO is placed attractively to capitalize on this FBV conversion growth even if the CV industry does not grow considering its dominant market share of ~35-40% and benefits to OEMs & customers from FBV conversion. CEBBCO’s FBV sales volume & revenue has grown at a CAGR of ~63% & ~62% resp. during FY10-FY12. We expect its volume & revenue from FBV segment to grow at a CAGR of 31% & 29% resp. during FY12-FY14E.”

“CEBBCO has forayed into the high margin (~30-35%) replacement market for bodies in Q1FY13, the first organized player to do so and executed 615 units in its pilot project itself. Currently, the company is using its promoter's existing Tata Motors (CV division) largest distribution network in Madhya Pradesh & Chhattisgarh for Project Replica. According to the management, the size of opportunity in replacement market is huge as current vehicles on road is ~4 mn that may need replacement & opportunity in tippers alone is ~6 lacs units. We believe this foray into replacement market provides immense growth opportunities for CEBBCO as the vehicle needs body replacement after ~3-5 years & CEBBCO is still not using its promoter’s existing Tata Motors distribution network in Uttar Pradesh & Uttaranchal which can be used by it going ahead.” 

“Considering CEBBCO’s strong relationship with OEM’s, its foray into body replacement market & Wagon manufacturing and recent preference towards FBV from OEMs & customers, we expect CEBBCO’s Revenues to grow by 43.0% & 26.2% and core APAT to grow by 53.6% & 35.0% in FY13E & FY14E resp. At the CMP of Rs.97, the stock trades at an attractive valuation of 6.3x its FY14E core earnings of Rs. 15.4. We initiate coverage with “BUY” rating and target price of Rs.123 (8x its FY14E core earnings). For valuation, we have not included NPV of Rs.18.6/share from Rs.230 Cr Sales tax subsidy which the company is expected to receive over the next 7 years starting FY13. Even if we extend this subsidy over the next 10 years and assuming 67% subsidy to come in the last 5 years, NPV comes out to be Rs.13.7/share,” says Sushil Finance research report. 

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