Buy Bharat Gears Ltd. - LKP Securities

"Gearing up for the big leap"

Investment Rationale

- Bharat Gears Ltd (BGL) is India's largest non OEM producer of Crown Wheel Pinion – CWP gears or bevel gears manufactured using Gleason & Oerlilon systems. It has a dominant position in the domestic CWP gears in the after market for ring gears and pinions. The After Market segment accounts for about 20% of its revenues.

- The Rs.4bn BGL is a leading player in the Tractor gear segment and this segment accounts for about 50% of its revenues.

- BGL with two manufacturing facilities (Mumbai & Delhi) is now putting up its third facility at Satara in Maharashtra and shall be spending Rs.650mn in 3 phases financed through debt and internal accruals.

- BGL‟s main customers are original equipment manufacturers (OEMs) in the tractor and commercial vehicle (CV) industry. The surge in the volume growth for these OEMs would derive demand growth for BGL's products. BGL has marquee customers which include Tata Motors, Mahindra, Ashok Leyland, TAFE, Escorts, VST Tillers Tractors, John Deere, New Holland Tractors, Carraro India, JCB among others.

- Shifting from diesel to PNG at its Faridabad unit and converting furnace based on Propane to PNG would in our view reduce power cost next fiscal and improve margins.

Valuation

The Rs.4bn BGL is the largest independent gear producer in India and its present market capitalisation of Rs.400mn is less than even the market value of spare land at its Mumbai facility.

BGL spent over Rs.500mn during the past three years to increase capacities and upgrade technology and this was funded largely through cash accruals of Rs.450mn over this period.

A dominant player like BGL in a business which is both capital intensive and working capital intensive trades at 0.6x book and we believe that with ROCE of over 20% and compelling valuations makes it an excellent small cap pick with an 18 month target price of Rs.125.

Source : Equity Bulls

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