Setco Automotive - Q3FY13 Result Update - SPA Securities

Setco's net sales stood at INR 869 mn, up by 15.4% QoQ on the back of strong replacement demand (contributing ~57% to revenues and were up by 33% QoQ). EBITDA Margin stood at 17.1%, up by 247 bps QoQ led by lower COGS. PAT margin was up by 283 bps QoQ to 11.2%. With improved replacement demand & increased focus on exports, we retain our "BUY" recommendation with a revised target price of INR 152.

Replacement market driving topline

Setco reported net sales of INR 869 mn, up by 15.4% QoQ & flat YoY, primarily driven by the replacement market demand, which has compensated for the lower volumes from M&HCV OEM segment. PAT at INR 97 mn was up by 15.3% YoY & 54.4% QoQ due to favorable tax incidence resulting in an effective tax rate of 5.4% (INR 11 mn MAT credit availed).

Favorable Sales Mix

In Q3FY13, Replacement sales stood at ~INR 492 mn, contributing ~57% to revenues and were up by 36% YoY. OEM sales stood at ~INR 296 mn, down by 34% YoY, contributing 34% to revenues. Exports at INR 81 mn, contributed 9.0% to sales and were up by 48% YoY.

Expansion in Margins

In Q3FY13, EBITDA Margin at 17.1%, expanded by 247 bps QoQ led by lower COGS (57.1% of sales in Q3FY13 against 58.5% of sales in Q2FY13). PAT margin expanded by 148 bps YoY & 283 QoQ to 11.2%.

Expansion plans

It is planning to incur a capex of ~INR 750 mn in next two year at its Uttaranchal and Kalol facilities to expand capacity as well as set up an R&D center. The company is also looking forward to increase its share of exports by more than 50% p.a. over the next 3-4 years. Setco's plan to set up an assembly line in Africa is on hold on account of current global scenario.

Outlook & Valuation

We expect Setco to gain from the improved replacement demand as the replacement cycle started from Oct'12 (completion of 2 years in changes to BS-III norms). Setco is also likely to gain with increased operations of Daimler in India from FY14. We expect M&HCV segment to show some signs of recovery post FY13, resulting in sustained growth for Setco. With increase in demand from replacement market and focus on expanding its exports share, we expect Setco's revenue & profit to register a growth of 37.4% & 35.2% respectively in FY14. We retain our "BUY" recommendation with a revised target price of INR 152 (164) in 9 months at 5.5xFY14E EV/EBITDA.

Source : Equity Bulls

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