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Q1 earnings review: Hits and Misses among the auto ancillary companies

While the June quarter overall had macro challenges and raw material price pressure, the demand scenario might stabilise in a quarter or two

August 22, 2017 / 12:56 PM IST
GNA Axles | Promoter Jasvinder Singh created pledge on company's 3 lakh shares.

GNA Axles | Promoter Jasvinder Singh created pledge on company's 3 lakh shares.

 
 
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During the earnings season, the larger companies get a disproportionate attention of investors/analysts and at times the less-known gems go unnoticed. Our research of companies in the market cap ranging from Rs 200 crore to Rs 10,000 crore threw up few such positive surprises that are worth taking a note of. Simultaneously, we also spotted some of the underperformers that got to be monitored closely.

Despite myriad headwinds in recent times starting from demonetisation to transition to BS IV and finally GST rollout, few companies posted strong show.

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The first name in our list is India Nippon Electricals, which is a manufacturer of electronic ignition systems for two-wheelers, three-wheelers and portable engines. The company posted a strong growth of 25 percent (YoY) in the net operating sales and its margin expanded significantly by 408 bps on the back of 335 bps fall in raw material prices.

Enkei Wheels India, the manufacturer of aluminum alloy wheels for two-wheelers and four-wheelers, also surprised positively. Despite the muted growth in two-wheeler and four-wheeler sales over the quarter, the company managed to grow its net operating sales by 13 percent (YoY). Additionally, it posted 301 bps (YoY) expansion in EBITDA margin despite the rise in the aluminum prices on the back of reduction in other operating expenses.

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Moneycontrol Research had spotted Shivam Autotech early in its research. The Company posted a healthy growth of 17 percent in the net operating income and its EBITDA margin expanded by 294 bps primarily on the back of fall in the raw material prices.

Finally, Atul Auto, a Gujarat-based manufacturer of the three-wheeled commercial vehicle also finds a place in the list of winners. Despite GST-led de-stocking and transition to BS-IV norms, the company witnessed a 25 percent growth in the net operating income and its EBITDA margin expanded by 163 bps.

The growth in the revenues was led by 18 percent growth in volumes on the back of good performance in exports. Healthy guidance of double-digit growth in FY18, on-track capex plan and potential growth in e-rickshaw are the other drivers of future growth that should reassure investors.

The steep rise in rubber prices not only took the sheen off the tyre companies as highlighted in our earlier note but several other players in the sector. Our list of losers mostly comprises businesses that bore the brunt of this commodity shock.

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JK Tyre & Industries, a manufacturer of tyres, tubes and flaps, posted a meagre 1 percent growth in the net operating sales and witnessed 1,759 bps contraction in the EBITDA margin, primarily because of the rise in raw material prices, up 30 percent over the same quarter last year.

TVS Srichakra, a manufacturer of tires and tubes saw 729 bps fall in the EBITDA margin on account of a rise in natural rubber prices.

Indag Rubber, a company engaged in the manufacturing of the pre-cured tread rubber, bonding repair and extrusion gum, and rubber cement (used for retreading of tires), also had a weak quarter. It posted a significant decline of 29 percent in the net operating revenues. Added to the woes was fall of 1,201 bps in EBITDA margin.

Investors should keep a hawk eye on rubber prices to spot the revival of these companies.

The last company in our list is Precision Camshafts, a manufacturer of camshaft castings and machined camshafts for the auto industry and railways. The company posted a 13 percent decline in the net operating revenues and 1,071-bps contraction in the EBITDA margin, impacted by raw material prices and operating deleverage.

While the June quarter overall had macro challenges and raw material price pressure, the demand scenario might stabilise in a quarter or two. Raw material will remain the joker in the pack. Smart management will still negotiate the same with élan, differentiating the men from the boys.
first published: Aug 22, 2017 11:21 am

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