Ajcon Global has come out with its report on Precision Camshafts IPO. The research firm has recommended to "SUBSCRIBE" the issue, in its research report dated January 22, 2016.
Precision Camshafts IPO review by Ajcon Global
Precision Camshafts is one of the world's leading manufacturer and supplier of camshafts, a critical engine component, in the passenger vehicle segment. The company supplies over 150 varieties of camshafts for passenger vehicles, tractors, light commercial vehicles and locomotive engine applications. PCL is techno savvy and use different technologies in their engineering and manufacturing operations including shell sand molding process technology, special (AI203/ ceramic sand care) technology and GBQII process technology which provides them a cost competitive advantage among their competitors. PCL operates through two state-of-the-art manufacturing facilities - an EOU unit and a domestic unit - both situated at Solapur, Maharashtra. As on September 30, 2015, the company had total manufacturing capacity of 13.38 million camshaft castings per annum from foundries and 2.22 million machined camshafts per annum from the machine shops. 70% of the company's revenue comes from export of camshafts to various OEMs directly and indirectly globally. As of FY15, the company has supplied over 58 million units of camshafts in the last ten fiscals and has serviced various customers across different geographies.
Global market for PV camshafts is estimated to be 100mn units worth over Rs 70bn. Globally the market for camshafts is oligopolistic in nature with only 4-5 major players limiting the size of competition in the hands of a select few. Key competitors include ThyssenKrupp, Federal Mogul Goetze, Linamar, and Mahle AG. Camshaft is one of the five critical components of an engine, hence historically, OEMs used to cast and machine camshafts in house. With increasing volumes and focus on lowering costs, OEMs have majorly outsourced casting, but a large part of machining is still done in house. Three prevalent technologies for manufacturing camshafts are - chilled iron cast (40% of market), assembled camshafts (30%) and chilled ductile iron cast (30%). Precision mainly caters to the chilled iron cast segment and has only recently forayed into the other value added technologies.
PCL is one of the leading suppliers of camshaft with 9% share of the global passenger vehicle camshaft market. The company has established healthy long term relationships with all the major global OEMs like Ford Motors, General Motors, Hyundai, Maruti Suzuki, Toyota etc. and a widespread marketing network across the geographies. Ford and General Motors are its largest customers contributing to over 32% (each) of its revenues; exports to Europe constitute +40% of its revenues.
PCL is expanding its capacity for ductile camshafts and assembled camshafts. The management is also planning foray into manufacturing and supply of sliding cams and cam modules as a part of expansion strategy. The company has recently entered into a technological tie-up with EMAG group of Europe(German machining and tooling Process Company, for transfer of certain know-how and technology for manufacturing assembled camshafts. This technology is the most popular technology with ~80% of market share in the respective segment) to foray into assembled camshafts (30% of the total market). The company intends to increase its revenue share from fully machined camshafts (+30% margins) as realizations are ~3x of camshaft castings (15-18% margins). As the revenue share from higher value added products increases, PCL should witness a healthy rise in profitability going ahead.
Geographically diverse business has reported revenue CAGR of 18.16% and net profit CAGR of 37.09% through FY11-FY15. Sales realization per camshaft has also improved from Rs. 375.26 in FY11 to Rs. 489.28 in H1FY16. At the upper end of the price band of Rs. 186, the IPO is valued at 28x FY15 post issue EPS. With due consideration to factors like a) leading supplier of camshafts for passenger vehicle engines in India and globally, b) state-of-the-art manufacturing facilities, technology innovation and engineering expertise, c)long term relationships with marquee global OEMs, d) strong competitive entry barriers in camshafts business, e) strong orderbook from Ford Motors, f) decent past financial performance, g) positive cash flow from operations over last four years, we believe the premium valuations are justified and recommend investors to “SUBSCRIBE” the issue.
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