With its numero uno status, product portfolio indispensable to any vehicle, strong clientele, best-in-industry operating performance, positive industry outlook and extremely reasonable valuation, the company is a worthy contender for the long term
PPAP Automotive (PPAP) is a provider of automotive sealing systems and interior and exterior automotive parts. It caters to all major auto manufacturers in the passenger vehicle (PV) space. With its numero uno status, product portfolio indispensable to any vehicle, strong clientele, best-in-industry operating performance, positive industry outlook and extremely reasonable valuation, the company is a worthy contender for the long term.Provides automotive sealing systems to PVs
PPAP is a leading manufacturer of auto components in India. It manufactures auto sealing systems and interior and exterior automotive parts. It has state-of-the-art manufacturing facilities in Noida, Greater Noida, Chennai and Pathredi, Rajasthan. The company caters to major original equipment manufacturers (OEMs) in the PV segment and has started making inroads in the commercial vehicle (CV) and two-wheeler (2W) segments.Strong clientele; sticky relationship a moat
Superior product quality, indispensable products to any vehicle and technological know-how have made the company a leader in providing automotive sealing systems to PVs. PPAP boasts of having a strong clientele in its kitty. It generates as much as 48 percent of its revenue from Maruti Suzuki India (MSIL), the leader in the PV space, and 30 percent revenue from another leading car manufacturer: Honda Cars India.
Due to the sticky nature of its business, the company enjoys long term relationships with its clients as is evident from its three decade long relation with MSIL. It has been aggressively focusing on adding new customers or new models from existing customers.
Recently, it started supplying to the new Amaze from Honda Cars and Yaaris from Toyota. It is also looking at adding Volkswagen as a sealing client. For injection growth, it is looking at opportunities in Samvardhana Motherson Group (SMG) and in Nissan Motor India.Focus on R&D
To remain leader in this space, the management needs to focus on matching with the technologies being adopted by OEMs. PPAP has been ahead of the curve in terms of technological advancements on the back of its two-decade and a decade long relationship with Tokai Kogyo for sealing parts and Nissen Chemitec Corporation of Japan for injection moulded parts, respectively. It has also established a joint venture with Tokai Group for automotive sealing systems to manufacture EPDM (ethylene, propylene, diene, and monomer) rubber and TPV (thermoplastic vulcanizates) based glass run channel.Capacity in place
At the end of Q1 FY19, capacity utilisation on the extrusion side (automotive sealing) stood around 70 percent. On the injection side it was around 80-85 percent. The company has spare capacity to meet future demand and hence has earmarked only Rs 30 crore for capital expenditure (capex).New avenues: CV and 2W segments
The CV segment did phenomenally well last year and registered a year-on-year (YoY) growth of 19.9 percent in FY18, driven by increased focus on rural economy, infrastructure and mining activities. With impetus on the rural economy in an election year and continued focus on infrastructure in select pockets, the CV segment should have a strong run going forward as well. To capture growth in this segment, PPAP has started supplying its products to light commercial vehicles (LCV) of SML Isuzu and BharatBenz.
The company has also started supplying to Suzuki Motorcycle India and Honda Motorcycles & Scooters India to benefit from opportunities accruing from the 2W segment. These new segments would provide new business to the company and de-risk client concentration.Strong PV industry outlook
Over the last few years, the PV segment has been growing at a strong pace on the back of very low car penetration (28 cars per 1,000 people versus 80 cars in China), rising disposable incomes and multiple financing avenues. Demand has received support from the launch of new and upgraded products by OEMs. Domestic volumes for PVs have grown at a compounded annual growth rate of 8.1 percent over FY15-18.
Despite the tough environment of rising oil prices and interest rates, outlook for this segment remains positive on the back of increasing capacity utilisation trend and capex plans by major OEMs.No impact from electric vehicles
PPAP’s products are likely to remain unaffected by electric vehicle (EV) disruption as the products it manufactures are not related to engine or drive train.Ownership lends comfort
Its shareholding pattern provides a big comfort to investors. Promoters hold 63.8 percent of total shares in the company and the remainder is held by the public. Though promoters are picking up stake from the open market in small quantities, it provides comfort to investors. Well-known investor, Dolly Khanna, also holds a percent stake in the company.Highest EBITDA in the industry
PPAP has been doing phenomenally well in terms of financial performance. Revenue grew at 13 percent CAGR over FY13-18 and its earnings before interest, tax, depreciation and amortisation (EBITDA) has witnessed 40 percent growth over the same period. Higher EBITDA growth was on the back of operational efficiencies and operating leverage attained by the company. This also led to a 1,400 bps EBITDA margin expansion over the same period. In fact, the company posted an EBITDA margin of 21.4 percent in FY18 – a big feat for an auto-ancillary company.
The management has been focusing on reducing debt and cut its total debt-to-equity ratio to 0.11 times in FY18 from 0.22 times in FY17.
On the back of operational efficiencies and reduction in total debt, the company has been able to improve its return ratios. Between FY13 and FY18, Return on Networth (RoNW) and Return on Capital Employed (RoCE) expanded 1,387.9 bps and 1,983.2 bps, respectively.
Valuation very attractive
The recent market volatility has made valuation extremely attractive. The company currently trades at 13.9 times and 12.2 times its projected earnings for FY19 and FY20, respectively.
Peer analysisPeer analysis suggests that PPAP is currently trading at a discount compared to the average multiple of its peers.
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