Accumulate Sterling Tools; target of Rs 210: Dolat Capital

Dolat Capital's research report on Sterling Tools

STL’s net revenue declined 81% YoY to Rs 203mn, due to slowdown of demand across segments (mainly CVs), impacted by production cuts due to lockdown imposed across India. EBITDA turned negative to Rs 49mn, due to negative operating leverage. Higher depreciation and interest costs led to net loss of Rs 88mn. Exports declined by ~85% in Q1 due to lockdowns imposed across geographies. STRT’s addition of Hyundai to its new customer list will lead to incremental revenues from FY22. This along with its long-term relationships with top OEMs, such as Maruti Suzuki, Tata, HMSI, Hero MotoCorp, M&M, Ashok Leyland, Fiat, and Daimler, we expect STRT 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. The company is currently operating at 50-60% utilization, in line with OEMs production levels. STRT’s key raw material is mild steel wire coil/rod ranging between 5mm to 25mm diameter. Stable RM prices , operating leverage and cost control measures will help margin to recover in the coming few quarters.

Outlook

At the CMP, the stock is trading at 21/15x for FY22/23E EPS. We recommend Accumulate rating, with TP of Rs 210 (based on 18x FY23E EPS).

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