Hold Setco Automotive; target of Rs 247: SPA Research

“Setco Automotive Q1FY13 results were below than our expectations. Net sales took a hit on account of lower offtake from the M&HCVs segment. EBITDA Margin at 15.03%, contracted by 447 bps YoY & 83 bps QoQ led by higher raw material costs, increased contribution of LCV clutches (low margin product) in the overall product mix and due to one-time overhead costs. With expectations of continued momentum in LCV segment, expected revival in M&HCV demand from 2HFY13, improved replacement demand & increased focus on exports, we retain our "HOLD" recommendation on the stock.”

“Setco reported Net Sales of INR 743 mn, up by 3.8% YoY & down by 42.1% QoQ, mainly on account of lower offtake in the M&HCV OEM segment. PAT at INR 62 mn, was down by 12% YoY & 59.9% QoQ inspite of favorable tax incidence in the last quarter. Setco has started to manufacture LCVs from FY12 and this is expected to increase its contribution to overall revenues from c.5% in Q1FY13 to c. 15% in FY14E.”

“We expect Setco to gain from the improved replacement demand from H2FY13 as the replacement cycle starts from Oct'12 (completion of 2 years in changes to BS-III norms). Setco is also likely to gain with increased operations of Daimler in India from FY14. We expect EBITDA margin to improve from the lows of Q1FY13 (15.03%) to 16.58% in FY13E & 17.33% in FY14E. We expect Setco's revenue & profit to register a CAGR of 21% & 14% respectively over the next two years. Setco has also announced issue of bonus shares in the ratio of 1:2. We retain our "HOLD" recommendation on the stock with a target of INR 247 in 18 months at 5.5xFY14E EV/EBITDA,” says SPA Research report. 

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