S ENKEI CASTALLOYS LTD Conference Call Update (Demerged Entity) Auto Ancillaries OUTLOOK FOR THE COMPANY Enkei Castalloys Limited is a joint venture between Rai and April 27 , 2010 Associates, India and Enkei Corporation of Japan. The Company is well established as manufacturer for Aluminum Die Cast products, Critical Engine Parts and Alloy Wheels for two wheeler and four BOOK PARTIAL PROFITS wheeler industry. The products fall in the category of derived AND HOLD demand. To act in an efficient manner and grab opportunities, Enkei CMP Rs. 120 Castalloys has been demerged in two separate companies. Enkei Target Rs. 150 Castalloys will focus on Foundry business and Enkei Wheels would focus on Wheels, which will be listed soon. We had recommended Investors to BUY the stock of combined entity between levels of SHARE HOLDING (%) Rs 80 and Rs 90. Since then the Company has been demerged. We now recommend investors to book partial profits in Enkei Promoters 37.65 Castalloys at Rs 120 and HOLD the remaining stock for target price FII / NRI 35.95 of Rs 150 for Enkei Castalloys. We expect Enkei Wheels fair value to FI / MF / CB’s 5.08 be close to Rs 69 levels. The price of combined entity comes to Non Promoter 4.29 Rs 179 which represent 100% upside from earlier recommended Public & Others 17.03 price levels between Rs 80 and Rs 90. STOCK DATA INVESTMENT RATIONALE Reuters Code ENKI.BO Bloomberg Code EKC IN • The growth path defined by the Indian Automobile Sector in recent BSE Code 531147 times has enabled Enkei Castalloys Ltd. to become a prominent NSE Symbol ENKEI player in Auto Ancillary sector. Market RS.132.0 mn Capitalization US$29.7 mn • The two and four wheeler sector is growing at 12% and 14% respectively giving strong boost to the Auto Ancillary Industry. 52 Weeks (H/L) RS. 126/14.17 Enkei expects to grow at around 20% in the coming years. • In recent times, many international players have set up their production and assembling units for ancillary parts in India due to availability of cheap labor and supportive environment for investments in the country. • The recent acquisition by the company in European region will help to add on international clients and widen the scope of Castings Export business. Equity Analyst • Constant urge for Research, Development and Innovation has Alok Deora resulted in improved quality of castings and wining new orders [email protected] from existing as well as new customers. Research Associate Shilpi Jain • The Company has now demerged into two units Enkei Castalloys [email protected] Ltd and Enkei Wheels. Enkei Wheels would be listed by end of May. Please refer to important disclosures at the end of the report For private Circulation Only. Sushil Finance Consultants Ltd, SEBI Reg. No. INB010982338. Office: 12, Homji Street, Fort, Mumbai 400 001. Sushil Financial Services Private Limited Member BSE : SEBI Regn.No. INB/F010982338 | NSE : SEBI Regn.No.INB/F230607435. OfficeAssociate: : 12, SushilHomji Street,Stockbroker Fort, Mumbai Private 400Limited, 001. SEBI Reg. No. INB230607435. Phone: +91 22 40936000 Fax: Phone: +91 22 +9122665758 22 40936000 Email : [email protected] Fax: +91 22 22665758. ENKEI CASTALLOYS LTD. KEY FINANCIALS (STANDALONE) Y/E Revenue APAT AEPS AEPS P/E ROCE ROE P/BV P/Sales March. (Rs mn) (Rs mn) (Rs) (% Ch.) (x) (%) (%) (x) (x) FY09 3,007.0 (115.1) (10.5) (281.4) NA 1.7 (19.2) 7.5 1.5 FY10* 2,096.9 134.0 12.2 (216.4) 9.9 9.5 22.2 2.2 0.6 FY11E* 2,516.2 199.2 18.1 48.7 6.6 12.6 24.9 1.6 0.5 *FY 2010 and FY 2011 results exclude results of demerged entity Enkei Wheels. BUSINESS PROFILE Enkei Castalloy Limited is a joint venture between Rai and Associates, India and Enkei Corporation (Japan) which is the second largest manufacturer of alloy wheels in the world. Enkei Castalloy currently leads the Indian market in manufacturing cylinder heads for two wheelers and four wheelers. The Company has the distinction of being a single source supplier of many critical engine parts to some of India’s largest OEMs. The company has in its list of clients all the major OEMs like Hero Honda, Yamaha, Suzuki and Piaggio in two wheeler segment and Eicher, Tata, John Deere and Toyota in four wheeler segments. Recently the company has demerged its two divisions in separate companies:- • Enkei Castalloys Limited which will continue the foundry business of the company. • Enkei Wheels which will act independently under the technical guidance of Enkei Cooperation Limited for manufacturing wheels. It is expected to be listed on the exchange by the end of May. Enkei Castalloys Limited has emerged as a prominent player in the aluminum casting and wheel manufacturing. Dedication towards quality improvement and cost reduction through constant innovation has made the company, vendor’s choice to supply to various OEMs. 22nd October 2007 2 ENKEI CASTALLOYS LTD. CONFERENCE CALL UPDATE We conducted a Conference Call with the Management of Enkei Castalloys Ltd and mentioned below is the snapshot of the Conference Call. SNAPSHOT OF CONFERENCE CALL • The Company has been demerged into two entities namely Enkei Castalloys and Enkei Wheels representing Foundry and Wheels businesses respectively. • Enkei Castalloy is expected to generate revenues of Rs. 2,500 mn during FY 2011. The Company expects to achieve Operating margins of 20-25% going forward. • Enkei Castalloy recently acquired assets of two European companies. The Company expects to generate revenues of approximately Rs.600- Rs.720 mn going forward. • Enkei Castalloy is currently able to match up to the demand with the current capacity in place. However in FY 2011 it expects to incur capex to the tune of Rs.120 mn to increase supply. • Enkei Castalloy repaid Rs.240 mn of debt during FY 2010. Approximately Rs.680 mn of debt is currently on the books of Enkei Castalloy and balance of Rs.920 mn has been transferred to books of Enkei Wheels. Looking at current cash flows, company is on its way to become debt free in next 2-3 years. • FY 2010 excludes results of Wheels business and company would be announcing results on the same soon. The wheels entity would be listed by end of May. • Enkei wheels is expected to generate revenues of Rs. 1,900mn during FY 2011 and end the year with marginal profits. 22nd October 2007 3 ENKEI CASTALLOYS LTD. Outlook for Enkei Wheels Limited Enkei Wheels is going to be a completely separate entity from Enkei Castalloys Limited. The Company would only focus on two wheeler and four wheeler wheel segment. The company is expected to generate revenues of approximately Rs. 1,900 mn for FY2010-11. We expect the Wheel Business to trade at 0.4x times its FY 2011E Sales. Based on this matrix, we expect wheel business fair value to be Rs 69. The Equity Share Capital will stand at Rs.55 mn. Current Competitive Environment • Any slowdown in infrastructure projects in the coming years will hinder the Automobile demand which will indirectly affect the company’s performance. • Larger threat is being imposed by the Chinese counterparts in the Ancillary sector. With a sharp rise in the demand for Passenger vehicles, Indian companies are losing on these bulky projects due to capacity constraints. OUTLOOK & VALUATION Enkei Castalloys Ltd is involved in manufacturer of Aluminum Die Cast products, Critical Engine Parts and Alloy Wheels for the two wheeler and four wheeler industries. It has recently demerged its wheel business which was into incurring losses and thus denting overall profitability. The demerged entity is expected to turn profitable by FY 2011. Enkei Castalloy ltd is expected to witness sharp improvement in its operating performance with the exclusion of its wheel business. At the current market price of Rs.120, Enkei Castalloy Ltd is available at attractive valuation of 6.6x its FY11E EPS of Rs. 18.1 and 1.6x of its FY11E Book Value. It is currently trading at 0.5x its FY11E Sales. We had recommended investors to BUY the stock of combined entity at levels between Rs. 80 and Rs. 90. We now recommend investors to book partial profits at current levels of Rs120 for Enkei Castalloys and HOLD the remaining stock for price target of Rs. 150.We expect Enkei Wheels fair value to be 0.4x of its FY11E Sales. On that basis we expect Enkei wheels fair value to be at Rs. 69. The price of combined entity comes to Rs 179 which represents 100% upside from earlier recommended price levels between Rs 80 and Rs 90. 22nd October 2007 4 ENKEI CASTALLOYS LTD. (Rs.mn) PROFIT & LOSS STATEMENT CASH FLOW STATEMENT (Rs.mn) Y/E March FY09 FY10 FY11E Y/E March FY09 FY10 FY11E PBT (123.7) 164.8 265.7 Net Sales 3007.0 2096.9 2516.2 Depreciation 275.9 125.5 135.3 Operating Costs 2198.6 814.4 981.3 Chg. in WC (7.9) (123.5) 37.3 Administrative Exp. 520.4 943.6 1082.0 Cash Flow from 272.1 136.0 371.9 Operations PBIDT 288.0 338.8 452.9 Chg. In Fixed Assets (523.3) 0.0 (120.0) Interest Cost 167.1 76.6 77.1 Chg. In Investment 0.0 0.0 0.0 Depreciation 269.3 125.5 135.3 Cash Flow from (393.6) 0.0 (120.0) Investing Other Income 24.6 28 25.2 Chg In Debt (5.9) 0.0 0.0 Extraordinary Exp.