ICICI Securities initiates coverage on Sansera Engineering with ADD rating

We initiate coverage on Sansera Engineering (SEL) with an ADD rating and a target price of Rs653 based on DCF, implying 18x FY24E earnings. Our analysis of SEL's business indicates: (a) strong capabilities for machining and forging precision components with connecting rods, rocker arms and gear shifter forks as key products; b) ability to consistently deliver better than industry growth and diversify business without any large-ticket M&A; c) strong product pipeline with orderbook at peak annual revenues of Rs14.5bn, with mix improving towards high-margin non-auto segments; and d) opportunity to improve kit value with existing customers (EV model kit value/unit is 10-20% higher than ICE). We believe the company's constraint lies in low gross block turns of sub-1.5x, limiting its RoCE and FCF generation. We expect SEL to deliver ~27% earnings CAGR in FY22E-FY24E driven by ~16% revenue CAGR and improving mix pushing RoCE up by ~400bps to ~17%.

- Industry-beating revenue growth amidst urgent efforts to diversify business: SEL's key component-products are: connecting rods, rocker arms, crankshafts, gear shift fork, etc. used in engine and transmission systems. Approximately 83% of its revenues currently come from ICE-driven vehicle parts. Close to ~35-40% of its overall revenues are from ICE 2W parts, which we believe will be exposed to EV transition in the coming years, thus pushing SEL's readiness to cater to e-2Ws. With hardly ~10-12% of its ICE 2W revenues coming from scooters, we believe SEL will have enough time to face the e-2W transformation wave in India. Company is already having a revenue mix of ~5% and ~15% from EVs and non-auto space, and is aiming to ramp them up to ~15% and ~25% by FY26E, to further diversify business risks. In FY18-FY22E, SEL delivered revenue CAGR of ~9% vs India 2W industry declining ~34% during the period.

- Expect ~16% revenue CAGR in FY22E-FY24E aided by non-autos; need to increase RoCE/FCF: With the company's new aerospace/defence-dedicated plant to be commissioned in FY23 and improving demand in aerospace segment, we expect SEL to grow segmental revenues to Rs2bn by FY24E (2.5x on FY22E). Total new order pipeline is of ~Rs2.6bn in the non-auto segment as of now. Off-road and agriculture and premium bicycle parts are the segments likely to grow faster on a smaller base. Though we are convinced of SEL's growth capabilities, we believe, there is enough scope to ramp up its FCF generation and improve RoCE from present lows.

- Initiate coverage with ADD: We like SEL's integrated business model of addressing all key parts of component value chain from the customer viewpoint and in turn grow ahead of the market, consistently. We believe improvement in RoCE and FCF, and quick revenue mix diversification, would drive rerating ahead. We value SEL at 18x FY24E implied earnings multiple with a target price of Rs653.

Shares of Sansera Engineering Ltd was last trading in BSE at Rs. 590.10 as compared to the previous close of Rs. 593.80. The total number of shares traded during the day was 3193 in over 382 trades.

The stock hit an intraday high of Rs. 599.00 and intraday low of 587.55. The net turnover during the day was Rs. 1893543.00.

Source : Equity Bulls

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SanseraEngineering AutoPartsandEquipment INE953O01021 ICICISecurities InitiatingCoverage ADD