Buy Gabriel India; target of Rs 52: Emkay

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Broking house, Emkay Research is bullish on Gabriel India and has recommended buy rating on the stock with a target of Rs 52.

Emkay Research report on Gabriel India: 

Top line for FY07 grows in line with our expectations

 

For Q4FY07, Gabriel India Ltd (GIL) reported net sales of Rs1,249mn backed by growth in three wheeler and four wheeler segment. For Q4FY07 overall two wheeler segment didn't perform well and it contained the top line growth of GIL. GIL earns around 55% revenue from two and three wheelers and around 35% from four wheelers and rest from others. Net sales for Q4FY07 and FY07 do not include the sales from engine bearing segment and so the quarterly and full year financials are not comparable. We estimate GIL's net sales for FY07 grew by 15% YoY to Rs5,163mn.

 

GIL has demerged the engine bearings unit. Earlier the company has said that the the likely effective date for demrger would be April 1, 2006. But the company has not yet received the final approval from the statutory authorities for the demerger mainly because the scheme envisages collaboration with Federal Mogul Corporation USA (FMC) which will become the majority shareholder in the demerged Company. FMC presently is under the proceedings of Chapter 11 of US Court and it will take some time for them to obtain the approval from the US court. The sanctioned scheme envisages such approval from US Court; accordingly the record date is being re-fixed on August 24, 2007 and the company is awaiting the approval of the Bankruptcy Court in USA. We believe GIL would get the final approval for the demerger in next 3- 4 months, but the delay in the demerger process would be negative for the stock in the short term.

 

EBITDA margins of core business - below our expectations

 

GIL's EBITDA for the quarter remained at Rs87mn which was growth of 56% YoY for the quarter. EBITDA margins for Q4FY07 improved by 256bps YoY to 6.9% mainly because of hive off of loss making engine bearings division. For FY07 GIL's EBITDA grew by 7% YoY to Rs267mn and EBITDA margins remained flat at 5.2%. As EBITDA margins for FY06 includes loss from engine bearings division, the financials and EBITDA margins for FY07 are not comparable. But the EBITDA margins excluding engine bearing division were below our expectations and we believe going ahead GIL will improve its margins to 8-9%.

 

Profit before tax grows by 103% YoY for FY07

 

GIL reported net profit growth of 458% YoY to Rs518mn, which includes profit on sale of Mulund land. GIL's adjusted net profit went up by 134% YoY to Rs207mn and its adjusted EPS went up to Rs.2.9 compared to Rs.1.2 in FY06. GIL reported decline in interest cost by 20% YoY to Rs66mn and depreciation cost by 20% YoY to Rs127mn mainly due to demerger of engine bearing division.

 

Business Outlook and Valuation

 

Gabriel is one of the leading players in the shock absorbers market in India. Gabriel has strong technology backup from Arvin Meritor and enjoys relationship with various OEMs like TVS Motors, Bajaj Auto, Maruti Udyog and Tata Motors. We believe demerger of engine bearings division is a landmark development for Gabriel and this coupled with repayment of debts from the sale proceeds of land in Mulund would give a big boost to the earnings and improve the balance sheet quality in near future. In addition to it, GIL is expected to save its employee cost to a certain extent in FY08E and onwards.

 

We have a positive outlook on the domestic auto industry and expect it to report growth at a CAGR of 12-15% for next 2-3 years, which would be beneficial for Gabriel.

 

We believe GIL has good scope for improvement in margins as demerger of engine bearing division would help GIL to focus on core business i.e. shock absorbers. At current market price, the GIL stock trades at a PE multiple of 9x and 7x on FY08E and FY09E respectively which we believe are very attractive. We believe GIL is one of the few stocks, which trades at an attractive valuation of 9x on FY08E earnings.

 

We remain positive on the long-term prospects of Gabriel and recommend investors to BUY the GIL stock giving a target price of Rs 52. At our target price GIL stock would trade 15x on FY08E core business earnings.