Mid & Small Cap Top Picks - Auto & Auto Anc.

Given the recent SEBI circular on minimum sector allocation criteria for MultiCap Fund, there will be a shift of fund from large cap to Mid and Small Cap companies. Given recovery in 2W/PV OEMs volume and acceleration in Abhishek Jain replacement segment demand, we expect B2B and B2C auto component Analyst players to witness recovery in earnings. We expect B2B players with higher +9122 40969739 exposure to 2W/PVs (Sandhar Technologies, Suprajit Eng, Minda Corp, [email protected] Subros, Asahi , JBM Auto and Lumax Auto Tech) to be better placed in Auto and Ancillary space. Among B2C players, we expect Amara Raja Ketul Dalal Batteries, Exide Industries and CEAT to benefit. Associate +91 22 40969770 In Midcap space we prefer Escorts, Ashok Leyland, Exide and Amara Raja [email protected] Batteries. Kripashankar Maurya In the Small Cap space, we prefer Asahi India Glass, CEAT, JBM Auto, Lumax Associate Auto Tech, Minda Corp, Sandhar tech, Sterling Tools, Subros, Suprajit Eng, +91 22 40969741 Varroc Eng. kripashankarm@dolat Selling pressure may be seen in – MSIL and due to rich valuations.

Top Picks in Mid and Small Cap - Auto Universe P/E Debt Debt/ Net D/E Total FCF Total FCF Company MCap CMP EPS (Rs/sh) EPS gr (%) (x) (Rs mn) EBITDA (x) (Rs mn) (3yr)/Mcap (Rs bn) (Rs) FY21E FY22E FY23E FY21-23E FY23E FY20 FY20 FY20 FY21-23E (%) Escorts 146 1192 52.7 63.8 80.7 15 14.8 483 0.07 -0.08 14,246 10 B2B Players Asahi India Glass 53 217 2.2 7.8 11.1 71 19.5 17,617 4.05 1.09 11,559 22 Bharat Forge 214 460 6.1 15.7 21.7 53 21.2 38,784 3.48 0.43 11,071 5 Jamna Auto Ind 18 46 0.3 1.2 2.2 95 20.7 1,557 1.36 0.29 1,490 8 JBM Auto 11 231 14.6 20.6 30.7 28 7.5 5,459 2.37 0.76 3,184 29 Lumax Auto Tech 6 93 4.4 7.1 8.8 26 10.5 949 1.04 -0.03 670 11 Lumax Inds. 14 1447 25.3 69.2 84.0 49 17.2 3200 2.03 0.63 1,404 10 Minda Corp 16 71 2.6 5.4 7.0 39 10.2 5155 2.06 -0.03 3,603 22 Sandhar tech 15 252 3.1 8.2 14.9 70 16.9 2,647 1.35 0.34 3,303 22 Sterling Tools 6 177 3.3 8.3 11.7 52 15.2 699 1.14 0.19 1,488 23 Subros 15 232 4.7 10.8 13.2 41 17.6 1,126 0.60 0.03 1,820 12 Suprajit Eng 24 169 6.7 9.8 11.5 19 14.7 3,113 1.42 0.29 3,273 14 Varroc Eng 42 310 -16.8 13.3 24.6 NA 12.6 42,506 5.18 1.06 4,757 11 B2C Players Amara Raja 127 745 32.1 40.2 45.4 12 16.4 560 0.05 -0.01 11,759 9 Exide Inds. 134 158 8.3 9.7 10.5 9 15.0 280 0.02 -0.03 22,801 17 CEAT 37 909 23.3 58.9 82.7 52 11.0 38,784 2.88 0.71 8,900 24 Source: DART, Company

September 13, 2020 September 13, 2020

1) CEAT - Betting on GST cut in 2W and scrappage policy for CV

(CMP – Rs 880, TP – Rs 1,092, MCap – Rs 36bn) . CEAT is the market leader in 2W segment (31% of revenue share) to benefit from GST cut in 2W. Also introduction of scrappage policy will help to revive CV tyres demand (31% of revenue share from T&B and 11% revenue from LCV). . Replacement demand has witnessed a strong recovery after the lockdown was lifted and reached almost normal levels. . Commissioning Greenfield facility of PCR and 2W and ramp up of TBR at the Halol plant in Q4FY20 would be key driver for medium to long term growth. This will assist in fulfilling a strong order book from OEMs and further improve its market share in the 2W/PCR segment. . Gross debt at the end of Q1FY21 was Rs 19.98bn (increased by Rs 700mn on sequential basis). Consolidated Gross Debt: Equity was 0.69. With major capex behind, CEAT is likely to complete its balance capex over the coming 2 years which will help generate FCF and reduce its Debt/EBITDA from 4.3xin FY21 to 2.3x in FY23. . Out of the overall planned capex of Rs 35bn, CEAT has incurred capex of Rs 22.5bn till date (including Specialty Business capex of Rs 3.5-4bn till date). The debt levels will reduce gradually as majority of capex is already incurred. . At CMP, stock is trading at 14/10x for FY22/23E EPS (vs historical mean of 14x). We recommend Buy rating with TP of Rs 1,092 (based on 14x FY23E Cons EPS).

2) Asahi India glass - Growth + Free cash flows= Buy

(CMP – Rs 217, TP – Rs 267, MCap – Rs 53bn) . Its business contains two verticals: contribution from automotive glass stands at 60% of overall revenue, while float/architectural glass contributes 40%. In automotive segment, there is a short-term impact on PVs volume due to COvid-19 but recovery will be faster as inventory base is low. Debt equity stands at 1X. . The Company has strong market share 73% in PV segment and most of capex has already incurred, don’t see material impact on FY21 fundamentals. . As most of capex has already been incurred, AIS is likely to generate strong free cash flow of Rs.11.6bn over FY20-23E (~20% of current EV) which would help to repay debt. . We forecast a 110% CAGR in earning in FY21-23E, driven by 20% increase in Revenue, 300bps margin expansion and benefits from the fall in interest and tax. At CMP, the stock is trading at 28/19x for FY22/FY23E earning (versus 5 years’ historical average of 38. We value the stock Rs.267 (based on 22x of FY23E EPS), and recommend BUY. September 13, 2020 2

3) Lumax Auto tech - Poised to ride on 2W recovery

(CMP – Rs 94,TP – Rs 133,MCap – Rs 6bn) . We are positive on the company led by: 1) sustained revenue growth from existing products lines, such as lighting, automatic gear shifter, and the sheet metal business; 2) incremental revenue from new products, including gear shift towers, AMT kits, oxygen sensors, and urea tanks (expect a revenue Rs1-1.5bn in the next 2-3 years); and 3) revenue and margin expansion in the aftermarket business (the company is launching several new products across its existing product range. . Revenue contribution for LATL 2&3W-52%, PV-13%, After market- 15%, CV- 10% & Others-10%. Bajaj auto, MSIL and HMSI contribute over 55% of total revenue. . Given its diversified product portfolio, debt-free balance sheet, a consistent dividend pay-out record (+20%), and efficient working capital cycle (20 days), we maintain our long-term positive view on the stock. . At CMP, the stock is trading at 13/11x for FY23/23E, which appears compelling. We forecast a 70%+ earning CAGR over FY21-23E and maintain our Buy rating, with a TP of Rs133 based on (15x FY23E EPS).

4) Varroc - On Recovery Path

(CMP – Rs 310, TP – Rs 492, MCap – Rs 42bn) . We expect that the worst is behind for Varroc and project strong earnings growth over the next 2-3 years supported by 1) revival in demand across key global markets, 2) cut in capex will help generate strong FCF and de-leverage balance sheet, 3) incremental revenue from past capacity addition (capex of ~Rs 28bn in FY19-20) and 4) cost cutting measures to help in expansion of operating margin. . We expect strong revenue/EBITDA CAGR of 23/80% in FY21-23E for VAR led by revival in demand both for VLS and domestic 2W market from lows and value the stock Rs 492 (based on 20x for FY23E EPS.)

September 13, 2020 3

6) Minda Corp- Ready to take off, Multiple tailwinds ahead

(CMP – Rs 70, TP – Rs 105, MCap – Rs 16bn) . Wind up of its loss making KTSN business is structurally positive (significant saving in employee cost, other expenditure) and we expect it to improve both margins and cash flow. . Strong revenue growth in Mechatronics division led by sharp improvement in die casting business. . Wiring harness would be benefited from increase in content per vehicle by 2x in 2W (to be reflect from 2Q and increased focus on cash flow generation and efficient capital allocation. . Revenue contribution for Minda Corp 2&3W-53%, PV-7%, CV- 20% and AFM-20%. . We believe that the stock deserves to trade at higher multiples (compared to current levels 13/10x for FY22/23E) as we forecast EBITDA to grow at 50% CAGR over FY21- 23E and there will a significant improvement in cash flow generation and return ratio. . We value the stock Rs 105 (based on 15x FY23E EPS). Maintain BUY.

7) Suprajit Eng.- Well poised to ride the 2W recovery

(CMP – Rs 168,TP – Rs 207,MCap – Rs 24bn) . Company is the market leader in the domestic auto cables with ~65% market share in the 2Ws and ~25% in the 4W segment . Expect rapid recovery in 2W and replacement, Revenue contribution for Suprajit-2Ws (36%), 4Ws (16%), Aftermarket (21%) and Non- Automotive Cables (21%). . There is a change in demand pattern owing to Covid-19 crisis, Economy bike and scooter demand is getting traction where CBS is mandatory (on extra cable added). The company has 65%market share in 2W cable. . Low leverage, Net D/E stands at (0.3x 4) Earning CAGR 35% for beyond FY21 (FY21E-23E). . At CMP, the stock is available at 17/15x the FY22E/FY23EP, we recommend investors to Buy the stock with TP Rs.207 (18x FY23E).

September 13, 2020 4

8) Subros - Deleveraging BS and revival in MSIL to drive earnings

(CMP – Rs. 232,MCap – Rs 15bn) . We have a positive view on the stock, due to (1) likely recovery in PV volumes from 2QFY21; (2) gain in market share driven by shift in demand towards petrol variants and expected gain in market share of MSIL (3) deleveraging of its balance sheet (4) diversification of its revenue base (PVs, CVs, railways, and home ACs); and 5) the home AC business potentially represents an incremental revenue opportunity of Rs. 2.5-3bn in the next 2-3 years. . In RAC segment we expect company to receive benefit of increasing localization, further, due to recent global supply chain issue we expect AC player to reduce their dependency from . Currently Subros supply AC component to Voltas and Havells. . Given the expected recovery in PV sales from Q2FY21 onwards, incremental revenue from new business verticals, reduction in interest cost, and benefit from the lower corporate tax rate, we estimate Subros to potentially report a PAT CAGR of 16% over FY20- FY23E. We value the stock at Rs. 264 (based on 18x FY23E EPS). Recommend Accumulate.

9) JBM Auto- Strong order book to drive earnings

(CMP – Rs 231,TP – Rs 309 ,MCap – Rs 11bn) . JBM Auto’s growth story is premised on 1) slowdown in PVs volume would be partially offset by new order wins in the sheet metal business 2) encouraging revenue potential in the tooling business (high margin +30%), given rising localization and outsourcing of tooling requirements by large global OEMs (cost-benefit of 25% in India); and 3) increasing economies of scale in the CNG bus business and new orders EV Buses. . The bus division, which was a drag (Rs.118 & Rs.46mn losses at EBIT level in FY18 & FY19 respectively) earlier turned profitable in FY20 to Rs. 98.4mn at EBIT level. The management expects a significant ramp up in the bus division in near term, as it has won new orders for both EVs and CNG (500 buses), which will provide significant revenue visibility for FY21-22E . We forecast a 45% EPS CAGR over FY21-23E. The stock is currently available at 16/11x for FY21/22E. We maintain Buy rating on the stock, with a TP ` 309 (15x 22E EPS).

September 13, 2020 5

10) Exide- All set to make a comeback

(CMP – Rs 158,TP – Rs 188,MCap – Rs 134bn) . The key near to medium term tailwinds for Exide includes – 1) Strong pickup in replacement demand and change in rural vs urban sales mix, (where Exide’s presence is better than AMRJ), 2) improved traction for batteries in tractor segment, 3) rising demand for home inverters led by WFH culture and 4) manufacturing units spread out would play as a strength in solid end to end supply chains and to cope with the disruption from Covid-19 pandemic. . Strong dealer network (~48k direct plus indirect dealers), diverse geographic footprint with deep presence in rural market, manufacturing units spread across regions and digital marketing engagement will help drive demand. . We recommend BUY rating with SOTP-based TP of Rs.188 (16x FY23E EPS + 1x Inv. (Rs.20) for insurance business).

11) Amara Raja Batteries- Growth levers intact

(CMP – Rs 745,TP – Rs 817,MCap – Rs 127bn) . Company’s increase in production capacity will help to gain market share in OEM segment (new business orders in 2W from RE and HMSI), low channel inventory expected to support both, dispatches and pricing and strong prospects for industrial batteries owing to increasing demand for UPS and telecom batteries. . Management expects sharp uptick in telecom revenue with rapid increase in data usage, focus to improve rural coverage and launch of 5G, which can increase the power requirement for the towers. At CMP, the stock trades at 18.6/16.4x FY22/23E EPS (vs 5-year historical mean of 25), we value stock Rs 817 (18x FY23E EPS) and maintain our Accumulate rating.

September 13, 2020 6

12) Sandhar Technologies- Well poised to ride the 2W recovery

(CMP – Rs 252, MCap – Rs 15bn) . We believe earnings are likely to improve from 2QFY21, driven by: 1) revival in 2W volumes; 2) increase in content per vehicle in the Locks and Mirrors division; 3) recovery in cabin and fabrication business; 4) ramp up in Aluminum die casting business and 5) cost cutting initiatives. . Moreover, introduction of new products like rear-parking sensors, tyre pressure monitors and smart helmets, together with expansion in customer base and increase in the wallet share from existing OEM customers will also aid revenue in the medium term. . 2W contributes 70% of overall revenue and major revenue comes from Hero and TVS Motors. PV-7%, CV-3% Oth- 20%. As Hero and TVS Motors account for ~52% of overall revenue, we believe Sandhar would be a key beneficiary of quicker recovery in vome recovery in these players. . Hero and TVS to outperform vs its peers owing to its product profile and geography mix, more than 55% revenue comes from these two players. . Low leverage, Net D/E 0.3x, Earning CAGR 106% for beyond FY21 (FY21-23). . Stock is currently trading at 17x 23E EPS and recommend Buy rating with a TP of Rs 269 (18x FY23E EPS).

13) Sterling tools- In Recovery mode

(CMP – Rs 177, TP – Rs 210, MCap – Rs 6bn) . We expect rapid recovery in 2W and tractor segment to support earnings from Q2FY21 onwards. Revenue contribution of STRT stands at ~27% 2W, 25% CV, 15% 4W, 10% Farm equipment and 6% industrial segment. . Further, Addition of Hyundai to its new customer list will lead to incremental revenues from FY22. We expect revival in key customers, such as Maruti, Hero and HMSI, will help Sterling’s revenue to recover from Q2FY21. . Quicker volume revival in key customers, such as Maruti and HMSI is expected from 2Q. In FY20, company incurred a capex of RS 500mn for expansion at the board manufacturing facility, increasing capacity by 10-12,000MT which will help cater to any incremental demand in future. . With all major capex behind, company is likely to incur only maintenance capex of Rs 100-150mn in FY21. . 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).

September 13, 2020 7

14) Escorts- Standing tall in tough times

(CMP – Rs 1,192, TP – Rs 1,279, MCap – Rs 146bn) . As rural demand and the agricultural sector are likely to be the least impacted by COVID-led disruptions with a quicker bounce back compared to the urban counterpart, we believe the tractor segment will outperform other automobile segments . In addition, re-stocking will also aid volume growth in the forthcoming months. Construction equipment and Railway division demand will also improve with revival in the macroeconomic scenario once the COVID-19 pandemic ebbs. . We estimate EPS CAGR of 24% over FY21-23E led by 11% growth in Agri-machinery business and 24% growth in other two segments. We value the stock Rs 1,279 (15x for FY23E EPS) and recommend Accumulate rating.

September 13, 2020 8

Valuation Matrix

Mcap CMP TP Upside Rating Adj EPS (Rs /sh) P/E (x) EV/EBITDA (x) ROE (%) Sr Auto OEMs (Rs bn) (Rs) (Rs.) (%) FY20 FY21E FY22E FY23E FY20 FY21E FY22E FY23E FY20 FY21E FY22E FY23E FY20 FY21 FY22E FY23E 1 Ashok Leyland* 193 66 67 2 Accumulate 0.8 (0.5) 1.7 3.7 80.7 NA 38.3 17.8 18.0 39.3 16.0 10.0 3.1 (2.1) 6.7 15.3 2 Bajaj Auto 843 2914 3204 10 Accumulate 176.2 152.0 177.3 191.8 16.5 19.2 16.4 15.2 13.2 14.1 11.3 9.8 24.5 19.2 18.9 18.6 3 Eicher Motors 591 2165 2095 (3) Sell 66.9 44.9 77.8 95.2 32.3 48.2 27.8 22.7 23.4 31.6 19.8 15.7 19.3 11.5 16.9 19.3 4 Escorts 146 1192 1279 7 Accumulate 53.6 51.9 63.2 79.9 22.2 23.0 18.9 14.9 21.2 19.2 15.6 0.0 15.2 12.3 11.8 13.0 5 Hero Motocorp 589 2950 3193 8 Accumulate 148.0 117.1 157.8 177.4 19.9 25.2 18.7 16.6 13.6 16.4 12.1 10.5 22.0 15.7 19.3 20.0 6 M & M 736 620 692 12 Accumulate 20.6 24.0 34.9 41.8 30.0 25.8 17.8 14.8 11.4 14.0 10.4 8.7 7.4 8.2 10.9 11.9 7 Maruti Suzuki 2199 7280 6791 (7) Reduce 187.1 121.6 232.9 271.6 38.9 59.9 31.3 26.8 25.2 36.9 18.9 15.1 11.9 7.4 13.2 14.0 8 SML ISUZU 6 413 316 (23) Sell (14.5) (52.6) (18.7) 17.5 NA NA NA 23.6 58.7 (11.5) 73.1 8.5 (5.3) (22.0) (9.2) 8.7 9 TVS Motor 207 435 355 (18) Sell 13.1 7.7 14.8 18.7 33.1 56.5 29.4 23.2 16.6 20.7 14.4 12.0 17.9 9.8 17.1 19.0 Auto Ancillary 10 Amara Raja 127 745 817 10 Accumulate 38.7 32.1 40.2 45.4 19.2 23.2 18.5 16.4 11.5 12.5 10.3 9.3 18.9 14.2 15.9 15.8 11 Apollo Tyres 66 116 127 9 Reduce 8.3 1.9 6.2 9.1 13.9 60.8 18.9 12.8 6.8 6.8 6.0 5.2 4.8 2.4 4.3 5.5 12 Asahi India 53 217 267 23 Buy 6.3 2.2 7.8 11.1 34.3 96.9 27.7 19.5 16.1 21.5 13.7 11.2 12.0 3.9 13.3 16.7 13 Balkrishna Ind 243 1258 1531 22 Accumulate 48.9 49.4 58.5 69.6 25.7 25.5 21.5 18.1 19.9 17.4 14.3 11.8 55.5 57.5 57.5 18.7 14 Bharat Forge 214 460 477 4 Accumulate 9.2 6.1 15.7 21.7 50.0 75.5 29.3 21.2 13.0 15.5 9.1 7.1 8.0 4.3 10.0 16.1 15 CEAT 37 909 1092 20 Buy 64.6 23.3 58.9 82.7 14.1 39.0 15.4 11.0 7.9 10.7 7.5 6.0 8.2 3.2 7.8 10.2 16 Exide Ind 134 158 188 19 Buy 9.7 8.3 9.7 10.5 16.3 19.1 16.3 15.0 9.7 10.1 8.5 7.4 13.6 11.0 12.1 12.5 17 Jamna Auto* 18 46 44 (4) Accumulate 1.2 0.3 1.2 2.2 38.3 152.9 38.9 20.7 17.4 32.9 16.8 10.9 9.3 2.3 8.7 15.0 18 JBM Auto 11 231 309 34 Buy 14.6 14.6 20.6 30.7 15.8 15.9 11.2 7.5 7.0 8.1 6.4 4.8 14.6 14.8 15.7 16.4 19 Lumax Auto Tech 6 93 133 43 Buy 7.3 4.4 7.1 8.8 12.7 21.0 13.1 10.5 14.5 18.0 13.0 10.9 4.4 3.0 4.1 4.3 20 Lumax Ind 14 1447 1513 5 Accumulate 76.9 25.3 69.2 84.0 18.8 57.1 20.9 17.2 10.4 15.9 10.4 8.5 17.8 7.9 14.7 16.2 21 Minda Corp 16 71 105 48 Buy 4.1 2.6 5.4 7.0 17.2 27.4 13.0 10.2 6.5 11.1 6.7 5.5 9.6 5.7 10.4 12.2 22 MRF 251 59100 NA NA Not Rated 3290 1820 2769 3256 18.0 32.5 21.3 18.2 10.9 11.7 8.8 7.3 12.3 6.2 8.8 9.5 23 Ramkrishna Forg 8 233 234 0 Reduce 2.9 (26.3) 1.8 17.9 79.0 NA 127.1 13.0 6.5 12.9 5.8 4.4 0.9 (10.5) 0.5 3.8 24 Sandhar Tech 15 252 269 7 Buy 9.5 3.1 8.2 14.9 26.6 82.4 30.8 16.9 9.0 12.2 8.8 6.4 9.0 3.1 8.2 10.2 25 Sterling Tools 6 177 210 19 Accumulate 8.1 3.3 8.3 11.7 21.9 53.1 21.2 15.2 11.4 14.4 9.8 7.6 9.8 5.3 9.7 12.0 26 Subros 15 232 264 14 Accumulate 8.5 4.7 10.8 13.2 27.2 49.1 21.5 17.6 8.1 11.2 7.4 6.2 7.8 4.0 8.7 10.1 27 Suprajit Eng 24 169 207 22 Accumulate 9.4 6.7 9.8 11.5 18.0 25.1 17.3 14.7 11.9 13.4 9.9 8.5 16.1 10.6 13.9 14.8 28 Varroc Eng 42 310 492 59 Buy 0.0 (16.8) 13.3 24.6 NA NA 23 13 9.0 19.3 7.5 5.5 0.0 (7.8) 6.3 11.0 Source: Company, DART, * Target Achieved, recommend to Accumulate on dips

September 13, 2020 9

DART RATING MATRIX Total Return Expectation (12 Months)

Buy > 20% Accumulate 10 to 20% Reduce 0 to 10% Sell < 0%

DART Team

Purvag Shah Managing Director [email protected] +9122 4096 9747

Amit Khurana, CFA Head of Equities [email protected] +9122 4096 9745

CONTACT DETAILS

Equity Sales Designation E-mail Direct Lines Dinesh Bajaj VP - Equity Sales [email protected] +9122 4096 9709 Kapil Yadav VP - Equity Sales [email protected] +9122 4096 9735 Yomika Agarwal VP - Equity Sales [email protected] +9122 4096 9772 Jubbin Shah VP - Derivatives Sales [email protected] +9122 4096 9779 Ashwani Kandoi AVP - Equity Sales [email protected] +9122 4096 9725 Lekha Nahar AVP - Equity Sales [email protected] +9122 4096 9740 Equity Trading Designation E-mail P. Sridhar SVP and Head of Sales Trading [email protected] +9122 4096 9728 Chandrakant Ware VP - Sales Trading [email protected] +9122 4096 9707 Shirish Thakkar VP - Head Domestic Derivatives Sales Trading [email protected] +9122 4096 9702 Kartik Mehta Asia Head Derivatives [email protected] +9122 4096 9715 Dinesh Mehta Co- Head Asia Derivatives [email protected] +9122 4096 9765 Bhavin Mehta VP - Derivatives Strategist [email protected] +9122 4096 9705

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