Talbros Automotive Components Ltd - Initiating Coverage - Buy - Kotak Securities

Talbros Automotive Components Ltd (TBA) was established in the year 1956 and is into manufacturing of gaskets & heat shields, forgings, suspension systems, anti-vibration components and hoses. TBA is a market leader in the gasket business that formed 67% of the company's consolidated revenue in FY17. Expected strong growth in automobile demand, new products/ technology introduction, new order wins and focus on exports is expected to drive company's revenue growth. EBITDA margin is expected to witness gradual improvement on the back of operating leverage from expected robust growth in revenues, substitution of imported raw material, foray into high margin products and internal efficiencies. We expect net profit to more than double from Rs157mn (Under Indian GAAP) in FY17 to Rs343mn in FY20E (under Ind AS). With robust earnings and limited capex, we expect the company's RoE to improve to ~18% by FY20E. We initiate coverage on the stock with BUY rating and price target of Rs.389 (implying an upside of 48%).

FY17 financials are under Indian GAAP and from FY18 the financials are as per Ind AS. Post adoption of IND AS, JV profit share will be directly added to consolidated profits, unlike proportionate (line to line) consolidation earlier. Thereby, financials from FY18 onwards are not comparable with FY17.

Key Investment argument

- Passenger car segment to drive gasket business revenue. Company is a market leader in the gasket segment with market share of ~38%. While the company enjoys market leadership position in the two-wheeler and the commercial vehicle segment, its presence in the passenger vehicle segment is negligible. Given weak presence in this segment, the company perceives huge growth potential in this segment and thereby considers the passenger vehicle segment as key focus area for growth in the gasket business. Company believes that post coated gasket and heat shields can help them make inroad in the passenger vehicle segment. Company is aiming at 10-15% market share of Rs1.5bn passenger vehicle gasket market.

- Forging business seeing surge in orders. Forging business, that accounts for 19% of consolidated revenues (as per Indian GAAP), is witnessing high growth. In the domestic market, the company has entered with Volvo Eicher and recently received orders from tier one supplier of HMSI. In the international market, TBA received a large order of Rs1.75bn (spanning over 7 years) from BMW. TBA will be a tier II supplier for this order. Company also earned orders from GKM, Italy. Company is adding two more presses (700 ton and 1,000 ton) and the same is expected to be operational by January 2018. Multiple order win gives visibility to strong revenue growth in the forging business.

- Strong revenue traction in joint ventures. TBA has three joint ventures (accounting for ~24% of consolidated revenues under Indian GAAP) - Nippon Leakless Talbros Private Limited (LTL), Magneti Marelli Talbros Chassis Systems Pvt. Ltd., (MMT) and Talbros Marugo Rubber Pvt. Ltd. (TMR). Strong volume growth from Honda two-wheeler and Hero MotoCorp will support growth at LTL. In MMT and TMR, revenue is expected to grow on account of strong volume growth expectation from Maruti Suzuki and new order wins. We forecast 16% revenue CAGR over FY17-FY20E for joint ventures.

- Exports - key focus area for the company. Exports account for ~21%/15% of TBA's standalone/consolidated revenues (as per Indian GAAP). Majority exports happen in the standalone business of gasket and forgings. TBA's management has earmarked exports as key growth area for the company and is targeting strong growth in export revenues over FY18-FY20E. Company has won order from JLR, Kubota Japan, Caterpillar Thailand, Ducati and Mitsubishi, Fuso Japan. TBA is expecting orders from Cummins USA and GE Austria. Company is taking various initiatives to grow its exports across business segments. Various new orders secured by the company in different business segments will drive export revenue growth going ahead.

- EBITDA margin to witness gradual improvement. We expect TBA's EBITDA margin to improve gradually in the coming years. Operating leverage from expected robust growth in revenues, substitution of imported raw material, foray into high margin products and internal efficiencies is expected to help the company expand margins in the coming years. We forecast EBITDA margin to increase from 10.3% in FY17 to 12.1% in FY20E (as per Indian GAAP).

Valuation

At the CMP of Rs.263, the stock is trading at PE of 13.1x on FY19E and 9.5x on FY20E earnings. TBA's PE multiple has witnessed re-rating in recent years on the back of pick-up in auto demand, new order wins, improved growth outlook and turnaround in JVs.

TBA is expected to witness robust growth in revenues over FY17-FY20E. Strong pick-up in automobile demand, high share of business with players like Maruti Suzuki (for JV's) and HMSI (gasket), new client addition, healthy new order wins - both in the domestic and export market and new product introduction (post coated gasket and heat shields) are expected to translate into robust 16% revenue CAGR over FY17-F20E (under Indian GAAP). Company is taking various efforts to improve its EBITDA margins going ahead. On the back of expected robust growth in revenues and expansion in EBITDA margin, we expect PAT to more than double over FY17-FY20E. Balance sheet is also expected to strengthen as debt-equity is likely to come down from 0.8x in FY17 to 0.5x in FY20E. Funding of capex is expected to broadly happen through internal accruals. Company is also taking measures to lower its working capital requirement (like raw material import substitution). With robust earnings and limited capex, we expect the company's RoE to improve to ~18% by FY20E. On the back of above mentioned reasons, we expect the stock to continue trading at premium valuations.

We initiate coverage on the stock with BUY rating and price target of Rs.389 (implying an upside of 48%). We value the stock at 14x PE on FY20E earnings.

Risk and Concerns

- Slowdown in domestic automobile demand
- Introduction of electric vehicle

Shares of TALBROS AUTOMOTIVE COMPONENTS LTD. was last trading in BSE at Rs.289.65 as compared to the previous close of Rs. 264. The total number of shares traded during the day was 150214 in over 2129 trades.

The stock hit an intraday high of Rs. 290.4 and intraday low of 245.2. The net turnover during the day was Rs. 42895961.

Source : Equity Bulls

Keywords