Recommendation from Auto Ancillaries Sector
This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year.
SHARDA MOTOR INDUSTRIES.: ACCELERATING ON A NEW GROWTH PATH
HERE IS WHY
✓Increasing market share for products
✓New JV to help foray into the CV and CEV space
✓Strong focus on research and development
In the last one month, BSE Auto has been one of the best performing sectoral indices. It has moved up by nearly 7 per cent compared to 1.97 per cent by the Sensex in the same period. This outperformance is not going to be temporary and we have reasons to believe it will continue for a few years. First, there is improvement in macros and secondly, there is a pickup in replacement demand and improvement in credit availability. The fall in commodity prices will further improve this sector’s attractiveness.
Therefore, it makes sense to invest in a company that is likely to benefit from this cyclical upturn. Sharda Motor Industries (SMIL) is one of such leading automotive ancillary companies supplying exhaust and suspension systems to major OEMs. It has a market share of around 30 per cent in exhaust systems in the domestic passenger vehicle (PV) industry, catering to almost all major OEMs except Maruti Limited. It also caters to major tractor manufacturers like Escorts, TAFE and Kubota, among others. In addition, the company also supplies to non-automotive players for genset applications like Cummins, Carriers, and others.
The company has been benefitting from BS VI implementation and is prepared with products to meet the next significant update in emission norms for construction equipment vehicles (CEV) and tractors. It has entered into a JV with Eberspaecher Group to manufacture commercial vehicle exhaust systems in India which would double its addressable market in CV and CEV and increase content per equipment by more than 100 per cent. Even in the PV segment its content per vehicle is expected to increase by 15 per cent with the implementation of real driving emissions (RDE) norms.
The company reported strong numbers for Q4FY22 with its profit after tax increasing by 60 per cent to Rs44 crore YoY and growing 13 per cent sequentially. Consolidated revenue came in at Rs618 crore, growing by 2.3 per cent YoY. Its EBITDA increased by 23 per cent YoY to Rs64 crore and EBITDA margin expanded by almost 100 bps led by fall in material cost from 82 per cent of revenue to 80 per cent in the latest quarter.
Going ahead, another trigger that will help the company’s performance is its foray into the electric vehicle (EV) space. It has initiated this move by forming a 74:26 JV with Kinetic Green Energy (KGEL) for developing battery packs with battery management systems (BMS) for electric vehicles and stationery applications. The JV would start production by Q3FY23 and would supply components to KGEL, which manufactures electric threewheelers and has sold more than 30,000 units so far. Also in favour of the company is its in-house research and development facility. It has a strong focus on research and development and develops a lot of products in-house that enables it to control development costs.
The share of SMIL is currently trading at Rs780, which discount last four quarter earnings by 15.6 times. It looks quite attractive if we consider the company’s debt-free status and the fact that it holds substantial cash and cash equivalents of almost 20 per cent of its market capitalisation. It has healthy return ratios too with ROCE and ROE of 36.55 per cent and 26.04 per cent, respectively. These factors make it a compelling BUY at the current price.
