Buy PPAP Automotive; target of Rs 653: Centrum

Centrum's research report on PPAP Automotive

PPAP Automotive Ltd (PPAP), established in 1978 is a leading manufacturer of Automotive Sealing Systems and Interior and Exterior Automotive parts in India. It is the single biggest supplier of sealing systems to Maruti Suzuki (MSIL), Honda Cars India, General Motors India, Toyota Kirloskar Motor, Renault Nissan India, Tata Motors, Ford India and Mahindra and Mahindra (M&M). It has a technical collaboration with Tokai Kogyo Co, Japan for Automotive Sealing System and Nissen Chemitec Corporation, Japan, for Injection Molded Products. PPAP has its five plants located in Delhi, Noida, Pathredi in Rajasthan & Chennai. Strong growth seen in demand for MSIL’s vehicles which account for 48% of PPAP’s revenues would lead to robust demand for the company’s products. The addition of new clients like SML Isuzu and Hyundai could boost the topline growth in the coming years. The company has completed all its major capex plans and established/shifted its plants near to its client’s plants. As the utilization of these new facilities ramps up, revenues would keep rising. Working capital cycle is also likely to reduce, led by lower inventory levels and shorter lead time. With access to global technology and leadership in sealing systems we expect a strong growth in topline and margin expansion in the coming years.

Outlook

We estimate PPAP Automotive to post topline CAGR of 15% and bottom-line CAGR of 21% over FY18-FY20E. We expect the company to report EBITDA Margin of 22% by FY20E versus 21.3% in FY18 (+70bps). Given the growth prospects, we recommend a “BUY” on the stock, valuing it at 16x FY20E EPS and arrive at a price target of Rs653 (28% upside).