Hold Sundaram Clayton, says Broker

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Hold Sundaram Clayton, says Broker

Broking house, Emkay Share and Stock Brokers is confident about Sundaram-Clayton, SCL. It has maintained a 'hold rating' on the company.

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Broking house, Emkay Share and Stock Brokers is confident about Sundaram-Clayton , SCL. It has maintained a 'hold rating' on the company.

About the company's itself and its second quarter and half yearly results review, the report says,

Die casting division drives the revenues for the company

"During Q2FY06, SCL continued with its healthy growth rate. Company reported a revenue growth of 14.9% to Rs 1517 million. Air brakes division reported growth of 15% to Rs 996.7 million, while die casting division also reported growth of 14.8% to Rs 520 million."

"With the product mix of the company moving towards the die casting products which get higher realizations for the company and also on account of the higher exports the EBITDA margins of the company improved by 138 basis points, bps, to 15.6%. The EBITDA for the quarter thus improved by 26% to Rs 236 million."

"The interest cost for the company has increased as the company had to incur debt to fund the ongoing capacity expansions in die casting division. The interest cost was has therefore increased from Rs 6 million to Rs 18 million in the current year. The company for the second quarter reported a growth of 16% in its PAT to Rs 145 million. The EPS for the quarter was Rs 7.7."

First half numbers on track for the full year

"For first half SCL has reported a growth of 18% in its revenues to Rs 2955 million. The air brakes division reported a growth of 17% to Rs 1988.6 million, while the die casting not to be left behind reported a growth of 20.6% to Rs 966 million. The exports contributed around 12.8% to the company's revenue to Rs 377 million reporting a growth of 16.5%."

"The EBITDA margins for the first half jumped 186 bps to 14.6%. The EBITDA for the first half improved by 35.6% to Rs 432 million. The company had to incur an additional debt of around Rs 110 million during the first half to fund the capex undertaken by the company. The company has capex plans to the tune of Rs 580 million in the die casting division for FY06."

"Although only Rs 70 million has been utilized the majority of the execution would be done in the second half. The interest cost in the first half jumped to Rs 33 million as against Rs 10 million last year. The PAT for the year was up by 17.7% to Rs 33 million."

About the company's outlook, the report says,

"SCL is present in the critical components segment of the ancillary industry. The company is a market leader in the air brakes and anti lock braking systems. Its revenues primarily depend on the growth on the heavy commercial vehicle industry. With the air brake now been made compulsory in the vehicles above 11 tonne segment, we expect SCL to benefit from this new development."

"On the exports front also the supplies to WABCO are expected to start next year, which can hike the air brakes exports nearly 3 times from the FY06 target of Rs 150 million. The die casting division of the company also has a healthy order book position for FY06. The main growth in this division is expected from exports, which have grown significantly in the first half. We expect the main ramp up to come in FY07 as the supplies to Volvo are expected to start in Q4FY06."

About the company's de-merger of air brakes divison, the report says,

"SCL is currently in discussion with its US partner American Standard Inc to re-structure its brakes division so as to develop it as an outsourcing hub. The strategy may involve splitting SCL's brakes division into a separate entity with its US partner and the aluminium die casting division alongwith the company's investment portfolio would form another."

"SCL has already shifted its air brakes facility to a separate facility in Chennai. The current shareholding pattern of SCL is approximately in the ratio of 40:40:20 between TVS group, American Standard and the retail public. Post splitting we expect the company to procure considerable orders from its US partner. The decision regarding the same is expected to be out around December 06. We believe this step would be highly beneficial for Sundaram Clayton."

About the company's valuations, the report says, "Overall we expect the company to report healthy profits in the coming year. At CMP of Rs 780, SCL is trading at a P/E multiple of 21.6x FY2006E earnings and 19x FY2007E earnings of Rs 36 per share and Rs 41 per share respectively. Presence in the niche segment, higher growth on account of the increasing domestic demand, as well as an excellent outsourcing opportunity through its parent and value of its investments induce us to maintain our 'Hold' rating on the stock."