Buy Clutch Auto; target of Rs 181: Angel Broking

Broking house, Angel Broking is bullish on Clutch Auto and has recommended buy rating on the stock with a target of Rs 181.

Angel Broking report on Clutch Auto:

Investment Argument   

Strong domestic replacement demand:

CAL is a strong player in the domestic replacement CV and tractor clutch segment with a market share of around 60%. Going ahead, replacement demand is expected to drive the growth in domestic market, where replacement market revenue contribution to total sales would be higher than OEM contribution.   

Robust Export growth:

During FY2006, the company reported a remarkable growth of 104.5%, in terms of export revenue. CAL is also targeting the overseas market with an export turnover of Rs 100cr by FY2008. To steer ahead in the heavy duty segment, CAL has strategically acquired the business of Pioneer Inc. We expect CAL's export revenue to grow at a CAGR of around 40% between FY2006- FY2009 from Rs 48.2cr to Rs 133.1cr.   

Product diversification to de-risk the business portfolio:

CAL is planning to increase its presence in the passenger vehicle segment. In line with this, the company is in talks with various passenger vehicle manufacturers in order to enter into long term contact with them. This type of segment diversification would help the company to de-risk its business, which is depending largely on commercial vehicle segment.   

Improved operating performance:

CAL turned around in FY2005 with profit of Rs. 5.7cr as against a loss of Rs. 0.4 cr in FY2004. It has posted robust 120% growth in Net profit in FY2006. Improvement at NPM front added to the bottom-line as CAL has paid off its high interest bearing debt on its books of account along with expansion in OPM.

Valuation:

Robust top-line growth with increase in share of exports is expected to result in CAL's bottom-line growing substantially in the current as well as the next 2-3 years. At the current market price of Rs 151, the stock is trading at a P/E of 9.2x FY2008E earning and 7.7x FY2009E earnings. It appears very attractive at EV/EBIDTA of 5.2x FY2008E. Hence, we recommend a BUY on the stock with target price of Rs 181.