Growth has been fuelled by the government’s focus on infrastructure, increase in mining activity, boost to rural sentiment from a normal monsoon and a strict ban on overloading of vehicles
The automobile sector has been on a strong upmove for the last 1 year, weathering storms like demonetisation, transition to Bharat Stage IV emission norms and rollout of the Goods and Service Tax. The sector continues to cruise smoothly. Within autos, the commercial vehicle (CV) segment has been a stellar performer. Domestic CV volumes registered a year-on-year (YoY) growth of 19.9 percent in FY18, much higher than overall industry growth of 14.2 percent.
Growth has been fuelled by the government’s focus on infrastructure, increase in mining activity, boost to rural sentiment from a normal monsoon and a strict ban on overloading of vehicles. With impetus on the rural economy in an election year and continued focus on infrastructure in select pockets, the CV segment should witness a strong run going forward as well.
Riding on the CV upcycle, the ancillary sector, which caters to this space, should see better times. We had picked four companies from the ancillary universe whose fortunes are strongly linked to the CV cycle. These companies have posted a strong Q4 FY18 performance and are currently trading at reasonable valuations.
The first company on the list is Jamna Auto Industries (JAI), the largest manufacturer of tapered leaf and parabolic springs for CVs in India. It supplies products to major original equipment manufacturers (OEMs) in India and commands a 72 percent domestic market share. It has around 90 percent market share in parabolic leaf springs, which are light weight.
In the quarter gone by, net revenue from operations grew 55.9 percent YoY on the back of strong growth in CV sales. On the profitability front, the company posted 76 basis points YoY contraction in earnings before interest, tax, depreciation and amortisation (EBITDA) margin and 48.3 percent YoY growth in EBITDA. Margin contraction was driven by significant rise in raw material (RM) prices, which was partially offset by reduction in staff and other operating costs. Profit after tax (PAT) grew 34.3 percent YoY.
Market leadership, marquee clientele, operating leverage and strong industry tailwinds should continue to support earnings going forward. The business trades at reasonable valuations that beckon investor attention.
Next on the list is GNA Axles (GNA) which operates in the niche auto ancillary segment and is a leading manufacturer of rear axle shafts, spindles and splined shafts. These find application in light and heavy CVs, off-highway vehicles and other specialty vehicles used for mining and defence. Due to its presence in this niche segment, GNA faces limited competition in the same product range. This has led the company to continuously gain market share. It currently commands a domestic market share of around 60-65 percent.
The company posted a YoY revenue growth of 62 percent in Q4 FY18, its highest ever quarterly growth at Rs 204.5 crore. Despite a significant rise in RM prices, the company was able to post a 100 bps YoY expansion in EBITDA margin. The expansion was primarily driven by lower operating expenses. Moreover, lower interest outlay and depreciation led to PAT growth of 169 percent YoY.
With a leadership position in the domestic market and significant presence in leading economies, coupled with strong positive industry outlook and reasonable valuations, the company merits investor attention.
Third on our radar is Automotive Axles. The company manufactures drive axles, non-drive axles, front steer axles, specialty and defence axles and drum and disc brakes. It caters to domestic and global manufacturers of trucks and buses, military and off-highway vehicles.
Riding well on the growth accruing from the domestic CV segment, the company posted a strong set of numbers for Q4 FY18. Net revenue and EBITDA witnessed a YoY growth of 30.6 percent and 47.8 percent, respectively. EBITDA margin witnessed a YoY expansion of 135 bps, led by a significant fall in operating expenses. The latter was partially offset by rise in RM prices. PAT witnessed a YoY growth of 58.2 percent.
Industry opportunities, strong financial performance, and reasonable valuations make it worth investment bet.
Last on our list is Ramkrishna Forging (RMKF), a manufacturer and supplier of open and closed die forgings of carbon and alloy steel, micro alloy steel and stainless steel forgings.
In Q4, volumes grew 41.2 percent YoY, with domestic and export businesses recording a growth of 46.2 percent and 25.3 percent, respectively. Growth in the domestic business was on account of reduced regulatory challenges and pick up in CV demand.
A pick up in demand for Class 8 trucks in North America drove exports. The management said export volumes were on the lower side due to capacity bottlenecks. It expects these issues to get sorted out, given its focus on automation and improving efficiency, which will free up 10-15 percent of capacity this fiscal.
Continuous enrichment of the product mix with leading OEMs led to a 9.5 percent and 10.1 percent YoY rise in domestic and export realisations, respectively.
Net operating revenue registered a strong 41.2 percent YoY growth on the back of substantial volume growth and an increase in average realisation. EBITDA margin expanded 425 bps YoY on the back of operating leverage. Raw material cost continue to spike up, but it’s a pass-through for the company with a time lag.
With strong domestic CV opportunities and pick-up in demand for Class 8 trucks (15 tonne and above) in North America, RMKF is in a sweet spot.Moneycontrol Research page