Setco Automotive - M&H CV slowdown to eat into sales; valuation inexpensive; Hold - Anand Rathi

Sales slowdown mirrors industry slump. We expect Setco Automotive's sales in 3QFY14 to have declined 12.8% yoy, to Rs. 758m, affected by the sharp decline in offtake in the M&H CV OEM segment generally; volumes in this segment would decline ~25%. To counter the slowdown in domestic OEM sales, management is now focusing on exports and the aftermarket. In FY13, the aftermarket and exports grew 16% and 31% respectively, while OE sales declined 31%.

Margins and profitability to continue under pressure. We expect the EBITDA margin, at 10%, to be down; it would still be down 710bps yoy. On the lower fixed-cost absorption, EBITDA is expected to dip 48.8% yoy. Hence, we expect PAT to fall 44.3%, to Rs. 54m. With the expected rise in volumes of high-margin after-market clutches, the margin would hold at the present level.

Short-term pain to continue, long-term brighter. We expect FY14 sales to be flat, with a 200-bp drop in the EBITDA margin and profit slipping 16.7%. However, in FY15, we expect the company to be a key beneficiary of the CV cycle recovery, with increasing exports and good aftermarket potential as added positives. We foresee 24% revenue growth, margins bouncing back 190bps to 14.1% and the RoCE rising from 15.3% to 18.5% over FY13-15.

Our take. We expect the company's financial performance to disappoint in FY14 as well. A recovery and upswing in the CV cycle in 2HFY15, however, would see Setco as the foremost beneficiary. Its short-term prospects continue to be dim. We maintain our Hold rating on the stock. We assign a one-year-forward PE of 6x FY15e and arrive at a target price of Rs. 88. Risks. Slump in auto demand, rise in commodity prices, insufficient price hikes by OEMs.

Source : Equity Bulls

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