Buy Wheels India; target Rs 315: Sunidhi Securities

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Buy Wheels India; target Rs 315: Sunidhi Securities

Sunidhi Securities is bullish on Wheels India (WIL) and has recommended buy rating on the stock with a target price of Rs 315 in its December 20, 2011 research report.

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Sunidhi Securities is bullish on Wheels India (WIL) and has recommended buy rating on the stock with a target price of Rs 315 in its December 20, 2011 research report.

"Wheels India (WIL), during Q2FY12, net profit advanced by 113.6% to Rs 11.0 crore and sales by 18.9% to Rs 504.2 crore. During Q2FY12, OPM and NPM stood at 8.2% and 2.2% respectively as against 7.4% and 1.2% in Q2FY11. During FY11, net profit advanced by 90.3% to Rs 24.6 crore on 35.8% increased sales of Rs 1702.2 crore. This gave an EPS of Rs 24.8. A dividend of 65% was paid. DER stood at 1.6:1 a bit high due to Capex loans. Catering mainly to the mining and construction equipment industry abroad, WIL derives about 20% of revenues from exports. Going forward, based on projections from customers, the company expects exports to continue to drive topline growth in the next 12-18 months. With 34 clients globally and supplying to markets such as Japan, Korea, North America, Europe, Brazil, China and Indonesia, the company has been a beneficiary of the strong demand for large mining trucks witnessed in these export markets."

"Wheels India, which primarily makes steel wheels for the auto industry, diversified into the power sector as a buffer against the volatile automotive market. The Wardha plant was set up to manufacture steel structural components such as girders and columns for power projects. WIL currently supplies to Bhel from this plant. Its other plant in Irungattukottai, near Chennai, makes parts for windmill manufacturers will break even this year. Besides, it has diversified into making air suspension systems for buses, trucks and trailers, which unlike wheels have a higher service and replacement market. Into the second year of operations, the plant at Wadhra, Nagpur will break even in FY11-12. WIL spent Rs 105 crore towards Capex in the last 2 years. WIL has recently entered into a technical agreement with Topy Industries, a Japanese steel wheel maker, towards process, design and development of steel passenger car wheels. WIL has planned a Capex of Rs 70 crore this year - a significant part of this will go towards expanding presence in the exports markets."

"WIL is going through a "massive restructuring" to focus better on individual plants from a logistics point of view. It is looking at relocation of lines in facilities where the cost advantage is more beneficial. For instance, if a customer's production centre has changed from one part of the country to another, it will look at production from that region. The market for tractors' equipment, air suspension systems and power plant parts also bring in superior margins when compared with 'mass market' products such as CV and passenger car wheels. A healthy outlook for tractor sales (WIL has 60% market share in tractor wheel supplies) and a robust export demand for mining wheels imply that the company will continue to show strong growth.  The rapid growth in both the auto and component sectors in Tamil Nadu, especially Chennai, which has earned itself the sobriquet 'Detroit of Asia', has been primarily due to availability of skilled manpower and a strong engineering sector. - Tamil Nadu was also a power surplus State then. And this helped attract investments to a large extent. The auto component sector in Tamil Nadu - home to several global auto majors such as Hyundai, Nissan, Ford, TAFE and Ashok Leyland - has had a heady journey till date. Tamil Nadu contributes nearly 25% of the overall auto component industry in the country, which clocked a turnover of $40 billion in 2010-11."

"By and large, WIL's Tamil Nadu plants supply to southern domestic and export customers. There are distinct advantages notably in flexibility that come from local plants in India, given the variance and cost of logistics. WIL is bullish on the mining and construction equipment market globally. Majority of the business in this segment comes from the export market. The auto industry, which accounts for over 75% of its overall revenues, will grow at a muted rate of about 10-12% this year on the back of overall uncertainties. This being a short-term aberration, in the long term, the industry will see over 15% growth rate for the next five years.  At the CMP of Rs 237, the share is trading at a P/E of 6.0x on FY12 earnings. We recommend BUY with a target price of Rs 315 in the medium term," says Sunidhi Securities research report.

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