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EV-disruption immune auto ancillaries keep going strong post Q3 show

Market leadership, a strong uptick in CVs, marquee clientele, operating leverage, and strong financial performance should support valuation for some of these companies, going forward

February 16, 2018 / 12:32 PM IST

We had handpicked few ideas from the auto ancillary space with an eye to provide immunity from the upcoming disruption led by Electric Vehicles (EV) in the auto sector. Post the earnings for the December '17 quarter, the portfolio deserves a review. Amid recent weakness in the markets, we are happy to report an outperformance of 6% over the auto index in little over two months. We continue to exude confidence in all our initial picks.

Minda Corp, Lumax Industries, Jamna Auto, Bharat Forge and Ramkrishna Forgings are the companies in the portfolio which posted a stellar set of numbers in the quarter ended December 2017.

Minda Corp posted excellent set of numbers driven by both net operating revenue (up 25.2%) and EBIDTA margin expansion (170bps) led by improved product mix and reduction in employee cost and other expenses. During the quarter under review, the company has unveiled its third die-casting plant in Pune to meet the rising demand within domestic and global markets. Apart from this, the company inaugurated its technical centre, Spark Minda in Pune indicating its focus on technology.

Recent quarterly performance of Lumax Industries was encouraging driven by 25.5 percent growth in net revenues on the back of 15 percent volume growth and improvement in realization. Lumax’s EBITDA witnessed a growth of 28.5 percent. It is noteworthy that the company launched new products for HMCL’s xPro and Super Splendor and Passion-Pro models during the quarter. Additionally, it added Morris Garages (MG) Motor India as its customer and received an order to supply tail lamps and headlamps for MG’s SUV.

Jamna Auto, Bharat Forge, and Ramkrishna Forging are the companies riding well on the upcycle in domestic Commercial Vehicle (CV) and demand uptick of Class 8 trucks in North America (NA).

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Jamna Auto reported 55 percent growth in the net revenues and 47 percent growth in its EBITDA. The EBITDA margin came at around 13.1 percent

Bharat Forge posted a 47.4 percent growth in net revenues driven by 38 percent growth in tonnage volume and 6.6 percent growth in realization. Domestic revenues witnessed a growth of 26 percent whereas exports grew by 61 percent. Within exports, North American exports almost doubled primarily because of the strong Class 8 truck demand.

Ramkrishna Forging’s net revenue grew 88.6 percent with domestic revenue growth of 77 percent and exports growth of 91 percent. Realization also improved by 8 percent and 19 percent in domestic and export markets respectively on the back of rising commodity prices. The company has also taken price hike of Rs4,000/tonne effective from January 2018 which is expected to improve gross margin. Moreover, the company’s foray into oil and gas sector is expected to contribute $1.5-2 million in 4QFY18 and $8 million in FY19.

Market leadership, a strong uptick in CVs, marquee clientele, operating leverage, and strong financial performance should support valuation for these companies, going forward.

Ev Portfolio

Motherson Sumi, Gabriel India, and Munjal Showa are the companies which despite posting strong/ in-line topline growth saw muted performance marred by higher raw material (RM) prices.

Motherson Sumi posted a significant growth of 36 percent in its topline. However, the margin was impacted by the lag in passing on the rise in the raw material (RM) costs. This led to EBITDA margin contraction of 180bps. The management indicated that there is a lag in pass-through of raw material prices, which should improve the margins, going ahead. The management expects next two-three quarters to be very good as the benefits from new plants will show up in the numbers. This, coupled with the push towards EVs should result in healthy growth in the topline and gradual increase in margins.

Gabriel India clocked a growth of 20 percent in its revenue driven by higher volumes across all segments. EBITDA, however, was marred by higher raw material and employee costs leading to contraction of 50bps in the margin. We continue to have confidence in the company on the back of its marquee clientele, diversified customer base, improving product mix towards passenger vehicles, focus on high margin after-market segment and export markets, and virtually no impact from EVs. Valuations also looks comfortable.

Munjal Showa posted a growth of 7.3 percent in its topline. However, its EBITDA witnessed a decline of 5 percent. EBITDA margin also contracted by 69bps, primarily due to rise in raw material prices. We believe that the company would be able to pass through the rise in raw material prices in the coming quarters. We continue to like the business as we expect it to ride well on the growth in 2W segment on the back of improved rural sentiments, pay revisions of government employees and new product launches. Additionally, Munjal Showa’s products are not impacted by transition to EV. This coupled with reasonable valuations warrants investors’ attention.

Finally, PPAP Automotive posted in-line set of numbers with a growth of 6.4 percent in its topline. Its EBITDA witnessed a growth of 15.3 percent on the back of lower raw material and other expenses. This also led to rise in EBITDA margin which came in at 21.4 percent compared to 19.7 percent over the same period last year. The company is worth investing in on the back of three upcoming manufacturing facilities, expansion by Maruti, and robust product portfolio with strong brand, focus on R&D and technical partnership with international players.

For more research articles, visit our Moneycontrol Research Page.
Nitin Agrawal is Senior Research Analyst, Moneycontrol. He has been writing research pieces on Automobile, Aviation and Telecommunication sectors, and has previously worked with Crisil.
first published: Feb 16, 2018 12:30 pm
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