Diwali Pick | Arunagiri of Trustline Holdings sees a serious uptrend in Sterling Tools

In an interaction with Moneycontrol, N Arunagiri, Founder and Chief Investment Officer of Trustline Holdings,  strongly recommended Sterling Tools as his Diwali pick for 2022.

For the past four decades, Sterling Tools has been India’s second-largest automotive fastener manufacturer. It has a well-diversified presence across all automotive segments and customers, and has four strategically located manufacturing facilities – three in the  north, in Faridabad, near Delhi, and one in the south, in Bengaluru.

It is one of the largest Motor Control Unit (MCU) suppliers for electric vehicles in India. MCUs are among the most important components of an EV. They’re involved in controlling an electric vehicle’s (EV) speed and acceleration, and comprise up to 10 percent of an electric two-wheeler’s (E2W) cost.

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The company counts all major auto original equipment manufacturers (OEM) across categories as its key clients, analysts said.

Arunagiri believes the stock is not just value for money, it is growth at a discount. “Which means you are getting a high quality business at a significant discount to what it is worth,” he said.

Talking about the stock’s performance, he said it was languishing at around Rs 120 just about 6-8 months back, but now trades at about Rs 225.

“If you look at the price-to-book ratio at which they traded even before starting the EV business, it was six times the book. Which means that even without factoring their entry into EVs and the prospects of that, the stock could probably go north of Rs 400-500 in future,” Arunagiri explained.

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On Friday, the scrip settled at Rs 216.40, down 4.7 percent on the BSE.

Strong forecast and outlook by the company has made Arunagiri confident about the company’s prospects.

The MCU business was about 8 percent of Sterling’s FY21 topline. That  is likely to go to 37-40 percent by FY25. Their MCU business will hit Rs 200 crore by FY23, which could rise further to about Rs 500 crore by FY25, highlighted Arunagiri.

He added that due to an unfavourable cycle over the past two-three years, the company’s operating margin had been around 14-16 percent. Now, as the cycle turns favourable, they will probably move closer to 18-20 percent.

In the quarter ended June, Sterling Tools’ consolidated revenue stood at Rs 173.88 crore, up 94.8 percent from Rs. 89.26 crore in June 2021. Quarterly net profit came in at Rs 9.58 crore, up 206.36 percent from Rs 3.13 crore in June 2021.

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