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Why did the Sansera Engineering IPO get strong subscription from QIBs?

Production incentives in the automotive sector, regular price increases by manufacturers to offset higher commodity prices and a surge in demand over the next few quarters augur well for the auto sector, which would improve valuations for Sansera after listing

September 20, 2021 / 06:05 PM IST
 
 
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Sansera Engineering’s initial public offering during September 14-16 was subscribed 11.47 times, with the portion reserved for qualified institutional buyers subscribed 26.47 times. The portion set aside for non-institutional investors was subscribed 11.37 times and the retail segment was subscribed 3.15 times.

The auto ancillary company’s IPO was valued at 35x FY21 earnings, which appears to be a 17 percent discount to its peers. Further, the asset turnover ratio at 1.15x in FY21 indicates that Sansera Engineering can sustain higher growth with likely improvement in automobile volumes in subsequent years. Additionally, operating cash flow yield at 6.7 percent appears to be the best among peers, which offers an edge, while consistent cash generation is likely to result in strong dividend pay-out in the ensuing years.

The auto sector has been underperforming the broader markets over the past few months on the back of semiconductor shortages, higher commodity prices and poor demand in the first quarter of FY22. But we believe the positive announcements with the production-linked incentive (PLI) scheme in the automotive sector, regular price increases by manufacturers to offset higher commodity prices, attractive valuations and a strong surge in demand over the next few quarters augur well for the sector, which in turn would improve valuations for Sansera post-listing.

Incorporated in December 1981, Sansera Engineering is an integrated manufacturer of complex and critical precision-engineered components across automotive and non-automotive sectors. In the automotive sector, it makes precision-forged and machined components and assemblies for engine, transmission, suspension, braking, chassis and other systems for two-wheelers, passenger vehicles and commercial vehicles. In the non-automotive sector, it manufactures precision components for aerospace, off-road, agriculture and other segments, including engineering and capital goods.

Sansera Engineering was one of the Top 10 global suppliers of connecting rods in the light vehicle segment and one of the Top 10 global suppliers of connecting rods for commercial vehicles in CY20. Given the critical applications of its products and the stringent quality requirements, it is difficult for new companies to replace precision components supplied by Sansera.

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The company’s diversification into the non-automotive segment helps to de-risk the business model and reduce its concentration on the automotive space. Its products such as connecting rods, rocker arms and crankshafts find application in off-road, agriculture, engineering and capital goods, marine and other segments. Advancement and continuous upgrading in technology have increased demand for higher-performance and top-quality products.

The supply-demand issue is temporary and any positive news with respect to the semiconductor shortage would be a big trigger for the sector. With the auto sector PLI announced by the government, there will be renewed investments in the sector and Sansera Engineering’s long-standing relationships with domestic customers will give it an edge in enhancing volumes.

The company has relationships spanning over 20 years with Honda India, 25 years with Bajaj Auto and 20 years with Yamaha India, while in passenger vehicles, it has ties spanning over 30 years with Maruti Suzuki and 10 years with Chrysler Automobiles.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before making any investment decisions.
Vikas Jain is the Senior Research Analyst at Reliance Securities.
first published: Sep 20, 2021 03:39 pm

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