DSIJ Mindshare

CREATING A FORCEFUL PRESENCE

Though there has been a subdued business environment for Indian automobile companies, there is an automotive manufacturer that has continued to whip up quite a buzz over the last one year. This is evident from the fact that its share price shot up by an astounding 400 per cent in just 12 months. An even more interesting fact about the company is that its share price doubled in just a single month after it announced the commissioning of its new facility at Chennai. With this great outperformance against its sectoral BSE Auto Index, which gave only about 16.5 per cent returns over the last one year, we are herewith taking a closer view of the fundamentals of Force Motors Limited (FML).

Business Model

FML is engaged in the design, development and manufacture of automotive components, aggregates and vehicles. The company operates in five segments: small commercial vehicles (SCVs), multi-utility vehicles (MUVs), light commercial vehicles (LCVs), sports utility vehicles (SUVs) and farm tractors. It manufactures its own engines, chassis, gearboxes, axles and bodies for its entire product range. FML exports its range of products to various countries in the Middle East, Asia, Latin America and Africa. It also assembles and tests Mercedes Benz engines for C, E, S, GL and M class cars and SUVs made in India since 1997. This shows vast experience in assembling for a premium brand. Recently, FML has started to assemble engines and gearboxes for BMW from January 2015 at its Chennai plant.

Organic Growth

Recently, FML opened a new facility at Chennai which was set up within a record seven months. The plant is spread over 1 lakh square feet and will assemble diesel engines for the BMW X1, X3, X5, 3 Series and 3 GT, 5 Series and 7 Series. The Chennai plant can produce 20,000 engines annually. The capacity can be increased to 50,000 engines per annum. BMW India currently manufactures 14,000 cars in a year, which is well within the initial production capacity of the plant. The plant has already started contributing to the company’s topline with the supply of 3,000 engines from January to June, 2015.

Some Projections

The FML management expects 15 per cent growth during FY16, similar to the last financial year. Various macro-economic factors like Goods & Service Tax and the government’s spend on infrastructure will provide traction to the company’s performance during the current fiscal year. More interestingly, its component business from Mercedes and BMW will be close to about 15 to 18 per cent of FML’s revenue. According to some projections, the premium car market in India is going to double every three years. This will ultimately boost business for FML in the near future. Mercedes Benz and BMW plan to launch 15 new cars across a wide price spectrum and FML has already taken advance steps to cater to this increasing business requirement. However, when contacted, the company’s management declined to reply on projections for its assembly business.

Shareholding Pattern

If one looks into the shareholding pattern for FML, the promoters and promoters’ group holdings is 60.12 per cent; foreign institutional investors (FIIs) holdings stands at 6.04 per cent; domestic institutional investors (DIIs) holdings stands at 1 per cent; and remaining non-institutional holdings are at 32.84 per cent as of June 31, 2015.

One of the major promoters’ viz. Jai Hind Investment increased its stake in FML to 55.92 per cent over a year - an expansion of 394 basis points as of June 31, 2015. The increasing promoters’ holding in the company shows the promoters’ confidence in its business operations. Furthermore, FIIs’ holdings too expanded by 31 basis points to 7.04 per cent and DIIs’ holdings too expanded by 74 basis points to 1 per cent over the last year. The promoter and promoter group have expanded their holdings to 60.12 per cent in June 2015 quarter from 56.54 per cent over the last one year. Incremental holdings by promoters as well as institutional holdings boost confidence among the retail investors’ 

Financials

On the financial front, FML witnessed 10.71 per cent CAGR of revenue over the period of FY11 to FY15. However its EBITDA decreased over the years with CAGR of 0.33 per cent during the same period. The company’s other income got boosted over the years with CAGR of 212.47 per cent and stood at Rs 65.78 crore in FY15. Its net profit rose with CAGR of 14.67 per cent over the past five years and stood at Rs 101.37 crore in FY15.

If we consider the latest quarter’s result, FML’s revenue increased by 17.43 per cent to Rs 640 crore in Q1 FY16 compared to the same period in the previous financial year. The company’s total expenditure increased 15.11 per cent to Rs 585 crore in Q1 FY16 on a yearly basis. Its total expenditure increased predominantly due to a 33.52 per cent increment in raw material prices amounting to Rs 479 crore during the 

FML’s EBITDA got boosted by 49.74 per cent to Rs 54.73 crore in Q1 FY16 compared to the same period in the previous fiscal year. The EBITDA margin of the company expanded 184 basis points to 8.55 per cent in Q1 FY16 on a yearly basis. FML’s other income increased by 26.44 per cent to Rs 15.16 crore in Q1 FY16 on a yearly basis. The net profit of the company rose by 84.28 per cent to Rs 35.75 crore in Q1 FY16 compared to the same period in the previous financial year. Its net profit margin too expanded by 203 basis points to 5.59 per cent in Q1 FY16 on a yearly basis.

Considering product-wise revenue, FML earned 69.43 per cent amounting to Rs 311.66 crore from LCVs; 20.41 per cent amounting to Rs 91.6 crore from UVs and SUVs; 9.72 per cent amounting to Rs 43.65 crore from tractors; and the remaining 0.44 per cent amounting to Rs 1.95 crore from SCVs during Q1 FY16.

Cash-Rich 

FML has significantly reduced its debt to equity ratio of 0.74 in FY11 to 0.01 in FY15. The minimal debt equity ratio signifies that the company has negligible debt and an almost debt-free status. Further, as an added advantage, FML has cash reserves of Rs 306 crore as of March 31, 2015. Being a cash-rich company, FML has an upper hand by utilising this huge cash to expand its manufacturing facilities in the near future.

Conclusion

On the valuation front, FML has a book value of Rs 1,000.83 per equity share as of March 31, 2015. Further, FML’s stock is trading at a price to earnings multiple of 35.94x times its trailing 12-month earnings per share of Rs 77.06. After analysing the company’s operations, the core product portfolio of FML is not that robust to compete with its competitors such as Tata Motors, Ashok Leyland and Eicher Motors in terms of both product offerings and distribution network. Further, the recent stock price movement over both the last one year and the last one month was predominantly due to news flow over commencement of its Chennai plant solely dedicated for BMW’s engine and gearbox assembly.

The assembly business revenue contribution for FML was below 20 per cent of the overall revenue. Though there are considerable growth expectations for luxury passenger vehicles in India, there is also quite some uncertainty over business capturing by Mercedes and BMW, and in turn for FML’s assembly operations in the days ahead. The way the stock price of FML surged over the last one month, if the business growth expectations do not materialize in the days ahead, the stock will show a considerable correction.

However, considering the operation of its dedicated plant for BMW and the stock price run-up, the upside in the stock is minimal. Hence, given the unfavourable risk-reward ratio, we recommend adopting a cautious stance for investing in FML at least for the next couple of quarters till the company starts delivering the expected growth numbers.

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