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 India, 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 Eicher Motors 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 Chennai 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 Engineering - 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%).