Stock Pick From The Engineering Industry

Low Priced Scrip is hidden gem, today's underdog, a stock with future potential that is expected to fetch returns within 1 year. This is a stock picked carefully based on a fundamental analysis of the company.

The company recommended as the Low Priced Scrip for this issue is a market leader in the engineering industry.

Here Is Why:

• The company operates in the Fully Built Vehicle segment, which has a strong demand.
• It has entered into high margin segments like the replacement market and the railway refurbishment business.
• It has a strong network of dealerships to assist growth in the replacement market.

Commercial Engineers and Body Builders Company (CEBBCO) is the largest player in the fast-growing Fully Built Vehicle (FBV) segment, with an approximate market share of around 40 per cent. The company has been primarily catering to Original Equipment Manufacturers (OEMs) of Commercial Vehicles to build FBVs over the chassis. Lately, CEBBCO has spread its operations to more profitable businesses that include the FBV replacement market as well as wagons, coaches, refurbishment and supply of components to the railways.

FBVs come with distinct advantages as compared to just supplying chassis. While on one hand it helps manufacturers (read OEMs) to demand a higher price for their products. While that is an advantage to the OEMs, even customers stand to gain from the lower excise duty (FBVs attract an excise duty which is two per cent lower than that charged on a chassis-based vehicle) on this segment which is passed on from the manufacturers to them. Buying FBVs also saves customers from the hassles of going to the local garage in order to get the vehicle completed.

It stands true that the sales of commercial vehicles have been subdued over the last few quarters. However, the demand for CEBBCO’s services has been fairly good, thanks to its foray into newer segments like the replacement market. Its topline registered an average YoY growth of 118 per cent over the last five quarters.

The replacement market, which the company has recently entered into, accounted for as much as 20 per cent of its total revenues in Q2FY13 as compared to just 8.9 per cent in Q1FY13. This robust growth has been largely due to the company’s strong network of contacts which is a result of the promoter family being authorised dealers of Tata Motors in Uttaranchal, Uttar Pradesh, Madhya Pradesh and Chhattisgarh. This segment commands a margin of 30-35 per cent, and has helped CEBCCO’s EBITDA margins to surge by 760 basis points on a YoY basis to 20.3 per cent in Q2FY13. Considering the growth seen in this segment, the company is likely to see a further improvement in its margins in the coming quarters.

CEBBCO’s presence also extends to the refurbishment and supply of components for railways. It has been seeing increasing activity in this segment. In Q2FY13, the company completed the delivery of 247 wagons for Rs 37.3 crore to Braithwaite & Co. It has also signed an MoU with Stone Intermodal (SIPL) for supplying five rakes (250 trailers), which it will start delivering some time during Q4FY13.

Its production facilities are located at Indore, Jabalpur and Jamshedpur with a total FBV capacity of 30000 units per annum. Of this capacity, a third is fungible, wherein the company can hop between 10000 units of FBVs and 1200 wagons in accordance with the demand. Additional capacity building for 10000 units of FBVs per annum is underway and is expected to be operational in Q3FY13. CEBBCO has aggressive expansion on mind. It has 100 acres of land at Jabalpur with only 20 acres under operation, which will prove to be an advantage. Overall, the company is currently running at 100 per cent capacity utilisation. In this classic case of demand exceeding supply, in Q2FY13, it had to choose between catering to the replacement market or OEMs.

Over the past three years, CEBBCO’s topline has registered a CAGR of 58.79 per cent. Although it hasn’t been giving out dividends so far, during Q1FY13, its board initiated a dividend policy of 20 per cent payout subject to a minimum PAT of Rs 10 crore. In accordance with this, we estimate a dividend yield of at least three per cent in FY13. Given this dividend yield along with a PE ratio of 9.73x and the EV/EBITDA of 7.21x, the stock seems worth a buy.