Buy CEBBCO; target of 123: Sushil Finance

Sushil Finance is bullish on Commercial Engineers and Body Builders Co (CEBBCO) and has recommended buy rating on the stock with a target of Rs 123 in its November 7, 2012 research report.

“Incorporated in September 1979, CEBBCO is the largest player in India’s non-passenger FBV (Fully Built Vehicles) segment. CEBBCO’s expertise comprises design, body building, fabrication and motion technology. It also caters to the entire railway rolling stock and power structurals segments.   CEBBCO is the largest player in India’s outsourced body building organized (MHCVs & LCVs) market with a market share of ~35-40% in a segment worth ~Rs. 1100 Cr as on FY12. It is a preferred vendor by all major OEMs. It has extensive product portfolio of more than 400 approved products which gives the company a diversified revenue stream and reduces the risk associated with the cyclicality of the CV sector.” 

“In India, FBV’s penetration is only 20% of the total (MHCVs & LCVs) market as on FY12 while the rest is sold as chassis to customers, who then get the body built from the unorganized players (Garages). We believe this market is gradually shifting towards FBV and expect its penetration to increase to ~35-40% by FY14. This shift will be driven by OEMs and customers as it implies better revenues & margins for OEMs while for customers, it implies better quality & efficiency, higher payloads due to lighter weight, reduction in lead time, warranty of 18 months, full funding on FBV & 2% excise duty benefit. The management expects 80% FBV penetration by FY17 and believes that OEM’s stated policy is to convert to 100% FBV by FY17. We believe CEBBCO is placed attractively to capitalize on this FBV conversion growth even if the CV industry does not grow considering its dominant market share of ~35-40% and benefits to OEMs & customers from FBV conversion. CEBBCO’s FBV sales volume & revenue has grown at a CAGR of ~63% & ~80% resp. during FY10-FY12. We expect its volume & revenue from FBV segment to grow at a CAGR of 31% & 29% resp. during FY12-FY14E.”

“CEBBCO has forayed into wagon manufacturing by leveraging its core strengths in designing & fabrication and set up a new plant with capacity of 1200 wagons & 150 EMUs (Electric Multiple Unit) per annum with two shifts. CEBBCO executed a 200 wagon order for Indian railways subsidiary at their premises in Q1FY13 & 47 more is executed in Q2FY13 and is now eligible to bid for new wagon orders from Indian Railways. According to the management, the new wagons opportunity is estimated at ~Rs. 6000 Cr and it expects to do 500 wagons in FY13 & 1200 wagons in FY14. We believe this diversification will contribute significantly to its revenues and profitability in FY14 and expects CEBBCO to do 350 & 450 new wagons in FY13E & FY14E respectively. Even if there is delay in new wagons order, CEBBCO can use its railway plant to make 10,000 FBV per annum as this plant is ~80% fungible which can translate to revenues of ~Rs.200 Cr for CEBBCO.”

“Considering CEBBCO’s strong relationship with OEM’s, its foray into body replacement market & Wagon manufacturing and recent preference towards FBV from OEMs & customers, we expect CEBBCO’s Revenues to grow by 43.0% & 26.2% and core APAT to grow by 53.6% & 35.0% in FY13E & FY14E resp. At the CMP of Rs.102, the stock trades at an attractive valuation of 6.6x its FY14E core earnings of Rs.15.4. We initiate coverage with “BUY” rating and target price of Rs.123 (8x its FY14E core earnings). For valuation, we have not included NPV of Rs.18.6/share from Rs.230 Cr sales tax subsidy which the company is expected to receive over the next 7 years starting FY13. Even if we extend this subsidy over the next 10 years & assuming 67% subsidy to come in the last 5 years, NPV comes out to be Rs.13.7/share,” says Sushil Finance research report.  

Institutional holding more than 40% in Indian cos

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