Buy Setco Automotive - ICICIdirect

- Dominant player in critical component business. Setco Auto is the market leader in the M&HCV clutch space meeting ~80% of the OEM demand. The M&HCV space has witnessed a demand slump in FY13E but growth prospects for OEM (~14% CAGR FY13-15E) and replacement side (8% CAGR FY13-15E) remain strong

- Market movement towards branded components. Setco Auto sells in the after-market through an authorised spares network of OEMs. There is an increasing trend of the replacement market moving towards branded components. Setco branded clutches would be a key beneficiary of the same being the market leader

- Business diversification with LCV entry. The company is expanding in the high volume LCV segment leading to improved capacity utilisation levels, especially in the wake of a slowdown in the M&HCV segment. Though margins are lower in this segment, it makes business less prone to earnings vagaries.

- High margins, strong RoEs. On the financials front, EBITDA margins have been consistently above the 15% mark while RoEs have been comfortably over 25%. We expect the margin profile to improve as the share of the high margin replacement segment in total volume increases

- Topline, EPS CAGR (FY11-15E) seen at ~11%, 12%, respectively. We believe Setco would post topline, EPS CAGR of ~11%, 12% in FY11-15E aided by an improvement in volume, realisation CAGR of ~7%, ~4% in FY11-15E, respectively, on the back of a revival in industrial activity and pick-up in replacement demand.

- Setco Auto is poised to witness an improvement in demand as MHCV demand picks up with rate cuts and higher industrial activity. Trading at an attractive valuation of PEG ~0.6x (CAGR FY11-15E) and 1.5x PBV, the stock looks an attractive cyclical bet.

Source : Equity Bulls

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