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September 30, 2019 S__tock___ TALES Stock Tales are concise, holistic stock reports across wider spectrum of sectors. Updates will not be periodical but based on significant events or change in price. Gabriel India (GABIND) CMP: | 110 Target: | 120 (9%) Target Period: 12 months HOLD September 30, 2019 Hopes of a smooth ride ahead… Gabriel India (GIN) is the flagship company of the Anand Group. Apart from being the market leader in the organised domestic automotive suspension Particulars segment (key products include shock absorbers, struts & front forks), the company is also among the top 10 shock absorber players globally. It has a Particulars Amount stated ambition of breaking into the global top five players by 2025. GIN’s Market capitalisation (| crore) 1 ,580.4 presence across major OEMs (traditional as well as new age) and market Total Debt (FY19, | crore) 7.2 segments (2-W, 3-W, PV, CV, off road, Railways) positions it uniquely against Cash & Investment (FY19, | crore) 9 5.4 EV (| crore) 1 ,492.2 peers. Its focus on driving innovation in its product offerings and thrust on Stock Tales aftermarket and export segments is slated to improve wallet share and 52 week H/L (|) 159 / 85 mitigate OEM slowdown led pain on sales & margin front, going forward. Equity capital (| crore) 1 4.4 Face value (|) 1.0 Product profile provides insulation against disruption shocks! Price Performance At ~| 10,000 crore, the domestic suspension products segment is a vital cog in the overall automotive components industry. Competition in the 14,000 250 organised space is limited to a handful of players, of which GIN’s diversified 12,000 200 presence across user industries (62% 2-W, 24% PV, 14% CV) and 10,000 aftermarket makes it stand apart. Moreover suspension products are 150 8,000 expected to remain untouched amid ongoing & imminent disruptive forces 100 like electrification & tighter emission controls. Absence of business model 6,000 50 flux is seen benefiting this product segment, with scale effect helping market 4,000 leaders to further consolidate their dominance. In our view, players like GIN 2,000 0 would be prime rerating candidates once present OEM slowdown subsides. Jul-17 Oct-16 Oct-17 Apr-17 Apr-18 Jan-17 Jan-18 Jun-18 Jun-19 Sep-18 Sep-19 Dec-18 Evolving channel mix to support profitability! Mar-19 Price (R.H.S) Nifty (L.H.S) At 11% & 4% of sales, aftermarket and exports, respectively, provide some healthy diversification from OEM’s channel fortunes. The company has a leadership position in the aftermarket division (~35-40% market share) and clocks higher margins there due to its B2C nature. It aims for this division to help deliver | 500 crore to revenues by 2022-23. Furthermore, GIN’s Retail Equity Research Equity Retail presence in developed markets (North America, Europe and Australia) and focus on emerging Asian markets is also expected to lend support to – margins as channel mix evolves, going forward. Valuation and outlook Given muted production numbers at its key OEM clients amidst steady state Research Analyst replacement market, conservatively, for GIN we estimate sales & PAT CAGR Shashank Kanodia, CFA of 1.0% & 9.7%, respectively, in FY19-21E. Earnings CAGR is also supported Securities ICICI [email protected] by recent corporate tax rate reduction with GIN’s tax rate in FY19 at 33.6%. While in keeping with growth challenges being faced by the entire auto Jaimin Desai space currently, we believe the company’s unlevered B/S, steady margin [email protected] profile, double digit return ratios and healthy cash flow from operations (~| 110 crore, ~7% CFO yield) stand it in good stead. Valuing GIN at 15x P/E on FY21E EPS of | 8.0/share, we arrive at a target price of | 120 with a HOLD rating on the stock. Key Financial Summary Key Financials FY17 FY18 FY19 FY20E FY21E CAGR (FY19-21E) Net Sales 1 ,513 1 ,833 2 ,077 1 ,854 2 ,117 1.0% EBITDA 144 171 178 148 185 2.1% EBITDA Margins (%) 9 .5 9 .3 8 .6 8 .0 8 .8 Net Profit 82 94 95 84 114 9.7% EPS (|) 5 .7 6 .6 6 .6 5 .9 8 .0 P/E 1 9.4 1 6.8 1 6.6 1 8.7 1 3.8 RoNW (%) 1 8.4 1 7.9 1 6.1 1 3.0 1 5.6 RoCE (%) 2 4.0 2 5.2 2 3.5 1 7.0 2 0.3 Source: Company, ICICI Direct Research Stock Tales | Gabriel India ICICI Direct Research Company Background Gabriel India (GIN) is the flagship company of the Anand Group. It was established in 1961 by Deep C Anand in collaboration with Maremont Corporation, with initial operations in Mumbai. Over the years, the company has transitioned from a manufacturer of shock absorbers into a provider of the whole gamut of ride control and suspension products including axle dampers, front forks, strut assembly, cabin dampers, seat dampers and dampers for EMU & LHB coaches as well as diesel locomotives. It has a well- diversified OEM client base across 2-W/3-W, PV, CV and off highway segments in addition to the Railways space. With FY19 consolidated revenues of | 2,077 crore, the company ranks among the top 10 shock absorber players globally and has ambitions to break into top-five players over time. The company manufactures products at 11 locations in India (including four satellite plants), with production volume of 3.9 crore units in FY19 and implied realisation at ~| 500/unit. Exhibit 1: Company history •Commenced operations in Mumbai in 1961. 1960s •During 1965-75, started supplies to various OEMs including Telco (Tata Motors), Bajaj Auto, M&M, Premier Auto, Ashok Leyland and Hindustan Motors •Between 1980-85, established new business segment with Swaraj Mazda & VECV as clients 1980s •Set up new plant in Khandsa to serve Maruti Suzuki in 1987 •Entered into technological tie up with SOQI Inc of Japan in 1991 •In 1997 signed technology assistance agreement with KYB Corporation, Japan. 1990s •Acquired TVS Motors, Tata Motors' passenger car segment and Yamaha Motor, Japan as clients during the decade •Won contracts from Renault India in 2006 •In 2009 ,commenced backward integration efforts on the 2-W side with its Japanese collaborators 2000s •In 2010 received business from Honda Cars for the first time and commenced supply to Volkswagen India •Established 4 business units (BUs) - 2-W & 3-W, Passenger Cars, CV & Railways and aftermarket 2014 •Signed technology license agreement with KONI BV of the Netherlands for manufacture of suspensions for CV, buses and industrial equipment •Started export of customised machines for manufacturing shock absorbers (built in-house with indigenous technology) to Torre Industries, South Africa 2016 •Received approval to manufacture Linke-Hofmann-Busch dampers for high speed trains from Indian Railways •Inaugurated solar power plant at Khandsa and installed 182 kW solar park at Dewas 2017 Source: Company, ICICI Direct Research While predominantly an OEM play (~85% of channel mix), GIN does have a significant presence in the aftermarket space for (~35-40% market share for shock absorbers and struts) and serves the 2-W, 3-W, PV, CV & Railways segments through a network of 664 dealers and ~12,000 retail outlets. The company exports to North America, Europe, Australia and Asia Pacific region, although exports as a proportion of overall sales remain fairly modest at ~4%. GIN counts all major domestic auto OEMs at its clients. However, no individual client forms >20% of GIN’s revenues. This uniquely positions GIN as a market leader in the Indian shock absorber market with a diversified presence across target segments, channels and clients. ICICI Securities | Retail Research 2 Stock Tales | Gabriel India ICICI Direct Research Exhibit 2: GIN manufacturing facilities Location Segment served Commenced Products Comments Clients Shock absorbers, front Technical collaboration with Yamaha Bajaj Auto, Honda Motor, Genze (M&M), Nashik 2/3W 1990 forks Motors Hydraulic System M&M, Yamaha, Piaggio Shock absorbers, front Technical collaboration with KYB Japan Hosur 2/3W 1997 TVS, Honda, Royal Enfield, Yamaha, Suzuki forks & Yamaha Motors Hydraulic System 2W, PV, CV, Shock absorbers, front Parwanoo 2007 TVS, Tata Motors, M&M Aftermarket forks, struts Bajaj Auto, Piaggio, General Motors, Renault, Chakan PV, Railways 1997 Shock absorbers, struts Volkswagen, M&M, Hyundai, Toyota, Tata Motors Khandsa PV 2007 Shock absorbers, struts Technical collaboration with KYB Japan Maruti Suzuki, Honda, Tata Motors Shock absorbers, struts Sanand 2W, PV 2010 Tata Motors, Honda (final assembly) Tata Motors, M&M, Daimler, Force Motors, Dewas CV & Railways 1992 Shox (CV) Ashok Leyland, VECV, Indian Railways Source: Company, ICICI Direct Research Gabriel India has agreed technical collaborations with a few players – namely KYB Corporation, Yamaha Motor Hydraulic System and Koni BV over the years, enabling it to access necessary technical expertise for its suite of ride control products. Its R&D spend is at 1.1% of sales, with the company having filed 75 patents as of 2019. Exhibit 3: Major clients and indicative product catalogue per segment Segment Clients Products Shock absorbers Front forks Mono shox 2-W & 3-W Others - hydraulioc shock absorbers, gas shock Canister shock absorbers absorbers PV Strut assembly Rear shock absorber E-assist adjustable shock absorbers Others - cartridges, McPherson struts Axle dampers Cabin dampers Seat dampers CV & Railways Air spring suspension Dampers for diesel Dampers for LHB coaches shock absorbers for EMU locomotives coaches Source: Company, ICICI Direct Research ICICI Securities | Retail Research 3 Stock Tales | Gabriel India ICICI Direct Research Industry Overview India According to Crisil, the domestic auto components industry size was at ~| 3.8 lakh crore as of FY19, with OEM demand accounting for the lion’s share of demand at ~60%.

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