Jamna Auto Industries

Initiating Coverage | Auto Ancillary November 23, 2015 Jamna Auto Industries A CCUMULATE CMP `234 Play on MHCV upcycyle Target Price `258 Jamna Auto Industries (JAI) is engaged in the manufacturing of suspension Investment Period 12 Months products for commercial vehicles viz leaf springs and lift axles. It is the market leader in the MHCV OEM springs commanding market share of about 60%, while Stock Info it has a 15% share in the aftermarket springs segment. Sector Auto Ancillary Recovery in OEM segment coupled with aftermarket focus to drive growth Market Cap (` cr) 890 The MHCV industry is clearly in an upcycle and is poised to grow at 16% CAGR Net Debt (` cr) 54 over the FY2015-2018 period. This would be on account of economic pick-up Beta 1.1 leading to uptick in freight, huge pent up demand due to low base (industry had 52 Week High / Low 275 / 130 halved over FY2013-2014 period), and improving profitability of the fleet Avg. Daily Volume 4,346 operators on account of firm freight rates and decline in diesel prices. The industry is likely to reach pre-slowdown levels by FY2018. Apart from growth in Face Value (`)10 the springs segment, JAI is witnessing robust demand for lift axles used in multi BSE Sensex 25,868 axle vehicles (JAI commenced supplies to market leader Ashok Leyland). JAI is Nifty 7,857 also in negotiation with high-end bus manufacturers for supplies of air suspension Reuters Code JMNA.BO systems. We expect the share of new products to inch up from 4% of revenues in Bloomberg Code JMNA@IN FY2015 to 7% by FY2018. We expect JAI to clock 14% revenue CAGR over the next three years. Shareholding Pattern (%) Operating leverage, raw material localization and new products to augment margins Promoters 43.8 JAI would reap benefits of operating leverage on account of healthy double-digit MF / Banks / Indian Fls 1.9 top-line growth. Steep reduction in crude prices due to slowdown would lower the FII / NRIs / OCBs 1.0 power and fuel costs which account for 7% of the top-line. Further, increasing Indian Public / Others 53.3 share of high margin products such as parabolic leaf springs and lift axles (new products’ share would go up from 22% currently to about 30% by FY2018) would also augment margins for the company. We estimate JAI’s operating margins to Abs. (%) 3m 1yr 3yr improve by 130bp over the next three years. Sensex (6.3) (7.8) 41.1 Outlook and valuation: JAI’s top-line is estimated to grow at 14% CAGR on JMNA 6.6 60.0 127.9 account of uptick in the MHCV OEM segment and ramp up of new products, ie parabolic leaf springs and lift axles. Further, operating leverage coupled with a 3-Year Daily price chart better product mix and savings on energy costs would enhance margins. We 300 expect JAI’s earnings to grow at a CAGR of 35% over FY2015-2018. JAI’s return 250 ratios are also estimated to improve on account of margin expansion, better working 200 capital management and lower gearing. We initiate coverage on JAI with an 150 Accumulate rating and target price of `258 (based on 15x FY2018E earnings). 100 Key financials 50 Y/E March (` cr) FY2015 FY2016E FY2017E FY2018E 0 Net sales 1,095 1,292 1,486 1,620 Jun-14 Feb-13 Feb-15 Sep-13 Sep-14 Dec-13 Dec-14 Mar-14 Aug-15 Nov-15 Nov-12 % chg 31.4 18.0 15.0 9.0 May-13 May-15 Net profit (Adj.) 29 48 60 68 Source: Company, Angel Research % chg NA 64.5 25.3 14.9 EBITDA margin (%) 8.6 9.3 9.8 9.9 EPS (`) 7.3 12.0 15.0 17.2 P/E (x) 32.2 19.6 15.6 13.6 P/BV (x) 4.7 4.0 3.4 2.9 RoE (%) 14.7 20.7 21.8 21.3 RoCE (%) 23.2 25.1 27.1 27.3 Bharat Gianani EV/Sales (x) 0.9 0.8 0.7 0.6 022-39357800 Ext: 6817 EV/EBITDA (x) 10.4 8.4 7.0 6.2 [email protected] Source: Company, Angel Research; CMP as on Nov 20, 2015 Please refer to important disclosures at the end of this report 1 Jamna Auto Industries | Initiating Coverage Investment Arguments MHCV industry in upcycle; expect 16% CAGR over FY2015-18 After two consecutive years of double-digit dip, the MHCV industry resurged strongly in FY2015, reporting a healthy growth of 17%. Policy actions by the government led to economic recovery. Further, government actions in terms of clearing stalled projects, increased infrastructure activity, and resumption of mining have further boosted MHCV sales. Also, improvement in fleet operators’ profitability due to firm freight rates and reduction in diesel prices have also boosted demand. Huge pent up demand due to severe slowdown in FY2013/14 coupled with economic revival has stoked demand. The MHCV industry is clearly in an upcycle and we expect the industry to maintain double-digit growth momentum and clock 16% CAGR over FY2015-2018 period. Given the pace of recovery, the MHCV segment should reach pre-slowdown levels (levels seen in FY2012) by FY2018. JAI derives about 70% of its revenues from the MHCV OEM segment and would be a beneficiary of the strong demand. Exhibit 1: MHCV industry trend Exhibit 2: Trend in freight rates and diesel prices 2.5 30.0 400,000 350,000 Implied 2.0 20.0 CAGR 16% 300,000 1.5 10.0 250,000 200,000 1.0 0.0 150,000 0.5 (10.0) 100,000 50,000 0.0 (20.0) 0 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E Freight Growth (%) Diesel Price growth (%) Source: SIAM, Angel Research Source: SIAM, Angel Research New product launches to boost top-line Under the “Lakshya” initiative, JAI is aiming for 33% revenue contribution from new products. JAI is focusing on new products such as parabolic leaf springs, lift axles and air suspension systems. JAI has been a pioneer in introducing parabolic springs (currently holds 95% market share) which are more strong as compared to conventional springs and offer more driving comfort. The penetration of parabolic springs currently stands at 18% and is expected to reach 25% levels over the next three years. JAI aims to be a leader in automobile suspension solutions. It aims to be a full suspension system provider and has expanded its product profile. In 2013, JAI ventured into manufacturing of lift axles and air suspensions with technological collaboration with Ridewell Corporation, USA. JAI successfully commenced supplies of lift axles to Ashok Leyland in FY2013 and is in negotiation with other OEMs. The share of lift axles in the overall revenues increased to 4% in FY2015. Similarly, JAI is also negotiating with SML Isuzu for commencing supplies of air November 23, 2015 2 Jamna Auto Industries | Initiating Coverage suspension systems. We expect the share of new products to improve from 22% to 30% by FY2018. Exhibit 3: Lift axles 120 8 100 6 80 60 4 40 2 20 0 0 FY13 FY14 FY15 FY16E FY17E FY18E Lift axle (` cr) % of revenues Source: Company, Angel Research Operating leverage, lower energy prices coupled with better product mix to improve margins JAI’s revenues are likely to grow at 14% CAGR over the next three years owing to steep uptrend in the MHCV OEM segment. The company is likely to draw benefits of operating leverage due to double digit top-line growth. Also, given the slump in oil prices due to slowdown in China, the energy cost for the company (forming about 7% of the revenues) is likely to remain lower resulting into margin improvement. Also, JAI is likely to benefit from a better product mix viz lift axles and parabolic springs. The MHCV industry is increasingly adopting technologically advanced parabolic springs which offer more driver comfort and are long lasting as compared to conventional springs. Parabolic springs fetch about 20% more realisaton as well as better margins. JAI is the pioneer in introduction of parabolic springs and already commands 95% market share. The share of parabolic springs is likely to increase from 18% to 25% over the next three years. Also, the share of lift axles is likely to inch up given the ramp up of supplies. We expect JAI’s margins to improve by 130bp over the next three years. November 23, 2015 3 Jamna Auto Industries | Initiating Coverage Exhibit 4: EBIDTA margins to improve Exhibit 5: Energy cost trend 150 12 25 10 9 120 10 20 8 15 90 8 7 10 6 60 6 5 5 30 4 0 4 0 2 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 EBIDTA (` cr) Margin (%) Power and Fuel Costs (` cr) % of sales Source: Company, Angel Research Source: Exchange rates, Angel Research Margin improvement coupled with improvement in leverage to boost return ratios JAI’s margins are estimated to improve by 130bp from 8.6% in FY2015 to 9.9% in FY2018. Also, JAI is following better working capital management by adopting just-in-time approach (leading to lower inventory) and having better negotiation terms with customers. Given the robust top-line growth coupled with improved working capital cycle, JAI’s capital expenditure is likely to be met through internal accruals.

Load more