Mar 08, 2018 01:16 PM IST | Source:

Don't miss these auto ancillary companies that saw stellar Q3 earnings

Most of the companies witnessed strong growth in the topline and expansion in operating margin mirroring the performance of various OEMs

Nitin Agrawal @agrawant

The auto component makers are cruising comfortably on the back of strong auto sales being witnessed by major OEMs (original equipment manufacturers). These companies posted a stellar set of earning for the quarter ended December 2017. Most of the companies witnessed strong growth in the topline and expansion in operating margin mirroring the performance of various OEMs. Additionally, the growth was higher because of the low base of last year due to demonetization that had stalled growth for the industry.

In the last couple of weeks, amid the weakness in the midcap space, some stellar earnings from mid-cap auto ancillary companies may have missed investors’ attention.  We, therefore, endeavour to spot companies from the space which should be on the radar of investors.

First company that Moneycontrol Research spotted is a play on the strong growth coming in from two-wheeler segment.

LG Balakrishnan & Brothers (LGBB) operates in transmission (80 percent of revenue) and metal forming segment. Within transmission, the company supplies Chains and Sprockets and rubber transmission. LGBB generates 95 percent of its transmission segment revenue from two-wheelers and the remaining comes from passenger vehicles.

The company posted a growth of 20 percent (YoY) in its net operating revenue and reported EBITDA margin expansion of 267bps (YoY) and EBITDA stood at 14.6 percent for 3QFY2018. The margin expansion, despite the rise in raw material prices, was due to tight cost controls on operating expenses and employee cost. Lower interest outlay aided the growth in profit-after-tax, which grew by 76.4 percent (YoY).

Strong growth outlook for two-wheeler segment, target of larger replacement market share (high margin segment), commencement of production at new facility, reduction in debt and strong clientele make LGBB worth considering for investment.

Another company in the list is Banco Products (India), which is one of the largest players in radiator and gasket business, generating around 80-85 percent of domestic business (70 percent of total) from OEMs and the remaining comes from aftermarket.

Net operating revenue clocked a growth of 29 percent (YoY) whereas EBITDA growth was much higher than the revenue growth (76.7 percent (YoY)). EBITDA margin witnessed an expansion of 241bps (YoY) on the back of lower operating and employee costs as percentage of net revenues.

The business catering to all domestic OEMs has a strong focus on R&D. This, coupled with reasonable valuation beckon investors’ attention.

Next company in the list is a proxy play on the growth coming in from the leader, Maruti Suzuki India, in passenger vehicle segment.

Bharat Seats is a joint Venture of Suzuki Motor Corporation, Maruti Suzuki India and Relans. The company manufactures complete seating systems and interior components for the automotive and surface transport. The company generates more than 90 percent of its revenue from Maruti.

Driving well on the growth coming from Maruti, the company posted a good set of 3QFY2018 earnings with 6.8 percent (YoY) growth in net operating revenues and 55.4 percent (YoY) growth in EBITDA. EBITDA margin also expanded by 194bps (YoY) on the back of fall in the raw material prices. Profit-after-tax almost doubled in the quarter under review.

The outlook for the company is very positive as Maruti is expected to continue to lead passenger vehicle segment and Bharat Seats will continue to maintain its share of business from Maruti. Moreover, Maruti’s expansion in Gujarat plant gives strong earnings visibility to Bharat Seats.

3QFY2018 result analysis - Part 4

Samkrg Pistons & Rings manufactures and markets a wide array of engineered pistons, piston pins & piston rings for the automotive markets.

The company posted 26 percent (YoY) growth in its net operating revenues and 18 percent growth in its EBITDA. The company ended the quarter with 96bps (YoY) contraction in EBITDA margin due to rise in raw material prices which got offset by fall in the employee cost. Profit-after-tax grew by 26.8 percent (YoY).

The company has a strong clientele in its kitty, is focused on R&D to adapt to changing emission norms and has superior financials.

Bharat Gears (BGL) in India’s largest gear manufacturer. It is a supplier of automotive gears and heat treatment furnaces. The company manufactures a wide range of Ring Gears and Pinions, Transmission Gears and Shafts, Differential Gears, Gear Boxes majorly for the automotive industry.

The company posted a strong 18 percent (YoY) growth in net revenues in 3QFY2018. Despite rise in raw material prices, the company was able to expand its EBITDA margin by 228bps (YoY). The expansion was on the back of fall in operating and employee expenses.

With leadership position, strong clientele and industry tailwinds, BGL is expected to do well in upcoming quarters.

The last company in the list is Lumax Auto Technologies which is a manufacturer of intake systems, integrated plastic modules, aerospace and defence engineering services, 2-wheeler chassis & lighting, gear shifters, seat structures and mechanisms, electrical and electronics components, etc. for two, three and four wheeler segments. The company generates around 30 percent of the total revenue from lighting products, and 45 percent of total revenues from 2/3 wheeler segments.

In 3QFY2018, the company’s net sales grew by 26 percent (YoY) and its EBITDA margin expanded by 268bps (YoY). The margin expansion was on the back of fall in the raw material prices. Profit-after-tax fuelled by higher other income and lower interest cost, grew by 212 percent (YoY).

Monthly auto volume numbers suggest a strong upward trend in both two wheeler and three-wheeler segments which should get reflected in the Lumax’s upcoming quarterly results.

For more research articles, visit our Moneycontrol Research Page.
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