Ucal Fuel Systems, after incurring losses for few years (consolidated basis), is back in the black for FY 2010-11. The company reported a smart turnaround with consolidated net profit of Rs 19.25 crore against last year’s loss of Rs 23.76 crore. One of the reasons for the company to report improvement is that the improved performance of its US-based subsidiary Amtec Precision Products, which it acquired in 2005 for USD 25 million. Since acquisition by Ucal Fuel, Amtec reported losses due to the slowdown in the US economy. The subsidiary has improved performance for the FY 2010-11 and the management expects that it will continue to report growth. Recently, Amtec consolidated its manufacturing facility from three plants to two, to improve its operational efficiency.

Presently Ucal Fuel Systems’ (UFS) share price is quoting at Rs 85, giving a market cap of Rs 192 crore. For FY 2010-11, the company has declared a dividend of Rs 4 per share (the scrip is quoting cum dividend), giving a yield of almost five per cent. Its EV/EBDIT amounts to six times, suggesting a scope for capital appreciation. On the P/E front too, valuations are fairly good, with a number less than 10 times.

Ucal Fuel Systems is an auto-component company from Chennai serving the four- and two-wheeler industry. It also manufactures machined components,  though this does not contribute significantly to sales. In the four-wheeler segment, it manufactures Multi Point Fuel Injection (MPFI) sets consisting of Throttle Body and Delivery Pipe Assembly. It also manufactures Oil pumps, Vacuum pumps and Fuel pumps for four-wheelers. This is one area in which the company is expected to expend efforts in this fiscal, to drive revenue. The largest revenue for the company comes from two-wheeler carburettors, which accounts for almost one-third of the total revenue (standalone). They supply Air Suction Valves for two-wheelers, which is their third-highest revenue generator. Bajaj Auto is their biggest customer, contributing nearly 25 per cent of the consolidated revenue.

In a recent interview, the company’s CMD has suggested that they are looking at improving EBDIT margins to 20 per cent (15 per cent). The management is confident of achieving topline growth of 20 per cent in the current year. Our back of the envelope calculation tells us that the company should report consolidated sales of around Rs 700 crore for FY 2012. Based on this, we expect net profit of around Rs 30 crore. On its equity capital of Rs 22.11 crore, the estimated EPS works out to Rs 13.63 (FV Rs 10). The current share price discounts the same by six times.

On the flip side, the company's revenue may be impacted due to a slowdown in the auto industry, its major customer. While we are not bullish on four-wheeler sales growth, we believe that the two-wheeler industry should continue to do well. This may have a minimal impact on the company’s financial growth. Also, the present market cap is too low for a company with consolidated sales of Rs 607 crore.

From the current business environment and prospects, we are expecting the scrip to be around Rs 110 in the next 12 months. This means that the scrip has the potential to give you 25 per cent capital appreciation from the present level. With dollops of Dividend Yield added, it goes to the level of 30 per cent, which are quite good returns. Also, we don’t expect a substantial downside risk on the counter from the present level. One can buy the scrip at the present level.