Gabriel India - A weak 3Q, but outlook good; Buy - Anand Rathi

Weak OEM sales on low demand. Decline in demand across most auto segments have weighed down on Gabriel India's (Gabriel) ytd performance. After robust growth in past three years in autos (22% CAGR), FY13 was subdued (at ~3%) with a weak trend expected to sustain in FY14. However, Gabriel recorded ~3% growth in 1H, and we expect ~7% growth in revenues in FY14 (expectation of 9.9% in 3QFY14), mainly due to business from new two-wheeler customers like Honda Motorcycle, Mahindra Two Wheelers. The proportion of two wheelers in sales has increased from less than 50% in FY13 to ~55% in 9MFY14.

Lower EBITDA. We expect revenue growth of 9.9% yoy to Rs. 3.3bn. Our EBITDA margin expectation is 6.3%, 20bps higher yoy, flat qoq. While EBITDA is expected to be 13.1% higher yoy, we expect profit of Rs. 95m (5.9% lower yoy).

Our take. Gabriel is focused completely on innovation and raising productivity, and reducing costs, working capital and overheads. It has also taken measures to improve the working capital cycle, results of which have begun to show. Debt reduction is also a focus area for the company, where results are now being visible. Additions to the customer base, exports and steady replacement sales are future growth drivers. Despite lower vehicle demand, Gabriel has sustained a decent, > 6% EBITDA margin, which can be boosted further by operating leverage and higher contribution from more profitable segments like exports and replacement. We maintain Buy, with target of Rs. 27 (at PE of 7.25x Mar'15e; current PE is 6.4x FY15e). Risks. Inadequate price hikes by OEMs, higher commodity prices, prolonged demand slump.

Source : Equity Bulls

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