Dolat Capital is bullish on Sterling Tools has recommended buy rating on the stock with a target price of Rs 200 in its research report dated June 29, 2020.
Dolat Capital's research report on Sterling Tools
STL’s net revenue de-grew by 27% YoY to Rs 879mn, due to the ongoing slowdown across the automobile sector and production cuts taken by major OEMs. Although EBITDA declined 12% YoY to Rs139mn, margin rose 300bps YoY to 16.7%, due to declining commodity prices and cost optimization measures. Given its long-term relationships with top OEMs, such as Maruti Suzuki, Tata, HMSI, Hero MotoCorp, M&M, Ashok Leyland, Fiat, and Daimler, we expect STL to emerge as the key beneficiary of the any cyclical upturn in the automobile sector. STL’s top-six accounts contribute nearly 65% to the total revenue. We expect revival in key customers, such as Maruti, Hero and HMSI, will help STL’s revenue to recover from Q2FY21. In addition, increasing contribution from special fasteners is likely to boost revenue and profitability in the medium term. STL’s key raw material is mild steel wire coil/rod ranging between 5mm to 25mm diameter. In the past six months, RM price corrected by 7-9%, which will help margin to recover in the coming few quarters.
At the CMP, the stock is trading at 19x of FY22E EPS. We roll over our valuations to FY23E and recommend Buy rating on the stock, with TP of Rs 200 (based on 18x FY23E EPS).
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