Stock Recommendations from Auto Ancillaries Sector

HERE IS WHY

·         Up-cycle in auto sector to boost volumes

·         Almost a debt-free company

·         Commands a market share in the entire segment

Indian auto ancillary industry is one of the fastest growing industries in the country and is riding high currently on the success of the auto sector. The auto component industry accounts for 22 per cent of the country's manufacturing gross domestic product (GDP).  Indian automobile industry is slowly recovering from the slowdown witnessed over the last two fiscals. We believe auto sector will pick-up further pace in FY17. Therefore, we have picked a stock from this space for our reader-investors.

Gabriel India (Gabriel), is one of the leading producers of ride control products like shock absorbers, struts and front forks in India. It commands a market share of 25 per cent in both the two-wheelers and passenger vehicles (PV) segments and it is also the market leader in commercial vehicles (CV) segment with a 75 per cent market share and over 51 per cent in the after sales segment. Company’s 60 per cent revenue comes from two and three wheelers which is the biggest portion of its revenue followed by PV and CV at around 25 and 13 per cent respectively. Channel-wise  OEMs form the largest customer base forming 83 per cent of the top-line. Aftermarket and exports constitute 13 and 4 per cent, respectively.

Gabriel has a reputed clientele with across the entire segment however it is an outpace in the two-wheeler industry where its key clients viz Honda India, TVS Motors and Royal Enfield form 75 per cent of the two-wheeler market of India. Going forward, the company is expected to receive more orders from Honda India’s upcoming plant in Gujarat which is likely to commence operations in 4QFY16. In PV segment, Maruti Suzuki is the key client for the company and it is expecting fresh orders for Maruti’s new model S Cross and its first ever LCV, which would enable recovery in PV segment from FY17. In the CV segment front, it has key clients including Tata Motors, Mahindra, Ashok Leyland and Daimler.

In the financial front, for six months ended September 30, 2015, the company’s net profit jumped 18 per cent at Rs 36.7 crore though its revenue marginally declined by 2.60 per cent Y-o-Y at Rs 717 crore. EBITDA margin was improved by 78 bps Y-o-Y at 8.8 per cent on lower raw material costs and expenses. The company is also improving volumes in aftermarket and CV segment enabled marginally offsetting the impact of lower two wheeler volumes.

The company has a strong balance sheet along with almost debt-free status. It has planned a capex of Rs 35 crore each over the next two years which will be easily managed through internal accruals. The company has consistently paid dividend in the past eight years and the current dividend payout is at around 25 per cent of its net profit. Company’s return on equity was around 18.5 per cent in FY15 and going forward it will increase by 200bps in next two years. On valuation front, it is trading at PE of 21x with a TTM EPS of Rs 4.57. We recommend BUYING the scrip with expectation of 30-35 per cent from the current market price in the next one year.