Retain Buy on CEBBCO - SPA Securities

CEBBCO reported net sales of INR 1374 mn, up by 3.5% YoY and down by 10.6% QoQ. EBITDA margin expanded by 464 bps YoY and contracted by 149 bps QoQ to 18.8%. This was led by higher margin replica bodies segment contributing ~23% to revenues. It has reported a PAT of INR 137 mn, up by 21.7% YoY and down by 16% QoQ. We retain our "BUY" recommendation on the stock.

Rising FBV conversion and Replica segment supports topline

CEBBCO's net sales stood at INR 1374 mn up by 3.5% YoY and down by 10.6% QoQ. CV segment sales stood at INR 1043 mn against a sale of INR 1066 mn in Q2FY13. Despite a sharp decline in the M&HCV volume during the quarter, the inclination of OEMs to sell more FBV has favorably supported the company's topline. Share of revenue from replica market (~30-35% margins) stood at 23.2% vis-à-vis 20.5% in Q2FY13.

Margin levers in place

EBITDA margin was up by 464 bps YoY & down by 149 bps QoQ to 18.8%. This was led by higher COGS (73.8% of sales in Q3FY13 against 72% of sales in Q2FY13). PAT Margin expanded by 149 bps YoY and contracted by 64 bps QoQ to 9.95%.

Dedicated Freight Corridor - Future growth driver

Contract ordering has commenced for the creation of nearly 3295 Kms of DFC. TATA's have been awarded the first contract in the said project. We believe this will lead to improve in demand for new and refurbished wagons which will help CEBBCO to reap the benefits going forward. As the conversion cycle of FBV's starts to flatten out over the next 5-6 years, the railway segment would act as the next growth driver for the company.

10000 FBV Capacity additions to aid growth

The company plans to increase its FBV capacity by 10,000 units in Q4FY13. This will help the company to become the primary beneficiary as FBV segment continues to garner a higher proportion of total CV industry. Company's Deori plant has been built in such a way that it's only ~20% is dedicated for wagon manufacturing and the rest is used as fungible capacity which reduces the company's dependence on the railway business.

Releasing pledged shares

A total number of 17,51,471 shares are pledged to HSBC & Axis Bank towards working capital limits. The promoters are in the process of releasing the same very shortly. The promoters had also pledged 24,25,000 shares against a loan of INR 50 mn from Religare Finvest Limited. Out of this 1,62,000 shares have already been released. INR 35 mn is pending loan amount as on date and they expect to repay INR 10-15 mn very shortly.

Outlook & Valuation

We expect CEBBCO's topline & bottomline to register a CAGR of 35% & 62% respectively over FY12-FY14E on the back of increasing share of FBVs, foray into new segments and increasing contribution from higher margin segments. The Deori plant's fungible capacity provides the company with a unique facility to switch between wagon manufacturing and FBV depending upon the market demand. Also the orders from dedicated freight corridor will augur well for the company. We retain our "BUY" recommendation with a revised target of INR 137 (140) in 9 months discounting FY14E earnings at 7x P/E and 5.4x EV/EBITDA.

Source : Equity Bulls

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