Auto Components: Gearing Up To Global Demand | CORPORATE ETHOS

Auto Components: Gearing Up To Global Demand

By: | October 17, 2017
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Compared to the first four decades of Indian Independence when Ambassador and Premier Padmini ruled the Indian roads followed by Maruti, Indian roads are now colourful with the latest car brands imported or manufactured in the country. Naturally, with more indigenisation, the requirement of automotive components and devices also shot up at a rapid pace.

sreekumar-photoThe industry has grown in clusters around small industrial towns such as Coimbatore and Ludhiana presently accounting for 7% of India’s GDP and employing over 19 mn people. They are present in both organised and unorganised sectors- with the latter making Original Equipment (OEM) such as  high value precision instruments while smaller players produce low value parts.

Amidst the healthy growth seen in automotive components industry, here is a look at the prospects of key players:

Pricol Ltd (BSE: 540293  NSE:PRICOLLTD)  Category: Small Cap

Coimbatore-based Pricol Ltd was established in 1972 by N Damodaran and L G Varadarajulu as an automotive components business. It is presently a leading OEM supplier to leading automobile companies. They manufacture oil pumps, switches, sensors and other products. The company turned profitable in FY 2015-16 and expects to clock a revenue of Rs 3000 cr by 2020. This was possible by restructuring operations, rationalising costs.

The company is planning an acquisition this year and low debt has enabled the company to put in fresh funds for expansion both organically and inorganically, according to Managing Director Vikram Mohan. The company is the second largest manufacturer of two-wheeler instrument clusters with the likes of Harley Davidson as its customers.

In June quarter, the net profit has fallen to Rs 5.03 cr while sales fell 15.33% to Rs 274.99 cr. On a returns perspective, 2.05% on monthly basis is on par with peers while quarterly and 6-monthly returns are negative. It fares well on return on equity and net profit margin is 0.50% while liquidity ratios are below peer average.

It is trading at a Price Earnings Multiple (PE) of 24.43 which is indicative of moderate pricing by the market.

On technical charts, Relative Strength Index (RSI) of 57.54 is bullish, MACD has witnessed a cross over, Average Directional Index (ADX) of 24 indicates range bound trading. Presently, trading above 50 DMA of 84.96.

Target: 100      Duration : 6 weeks   Strategy : Buy/Hold

Munjal Auto Industries Ltd (BSE:520059, NSE: MUNJALAU) Category: Small Cap

Munjal Auto Industries Ltd is a leading automobile components maker producing exhaust systems, spoke rims, steel wheel rims, fuel tanks, seat frames and other automotive assemblies. It is the largest manufacturer of exhaust systems in the world producing 22 systems per day. It has an integrated manufacturing facility, engineering tool room, design and tool manufacturing facility. The company started off by manufacturing cycles in 1985 and started automotive components making in 1997.

In June quarter, net profit rose 28.22% to Rs 10.36 cr while sales rose 15.59% to Rs 257.36 cr. It has provided 2.5% returns monthly, 18.96% quarterly and 71.19% on half-yearly basis.  It is trading at a PE of 25.22 which is suggestive of moderate pricing by market. On technical charts, RSI of 71.16 is bullish, MACD has witnessed a bullish crossover, ADX of 35 denotes uptrend. Stochastic indicator is also moving towards bullish territory. It is trading well above 50 DMA of 69.75.

Target: 95   Duration: 3 weeks       Strategy: Hold/Sell

Shivam Autotech Ltd (BSE: 532776, NSE: SHIVAMAUTO)  Category: Small Cap

Shivam Autotech was established in 2005 and has become the largest manufacturers of transmission gears and shafts in India. Headquartered in Delhi, it has over 3000 employees catering to the requirements of leading automobile companies. Products include transmission gears and shafts, starter components, alternator components and steering components. It has won several awards for excellence and an impressive list of clients. Promoters hold 74.80% stake.

In June quarter net profit has fallen 15.76% to Rs 0.99 cr while earnings per share has fallen to Rs 0.10 cr. Sales has grown 20.15% to Rs 138.85 cr. On a returns perspective, it has provided 52.08% monthly, 39.8% quarterly and 103.29% half yearly.

On financial ratios, the scenario is mixed with good operating profit and gross profit margin but return on equity is below peer average, poor liquidity and debt equity ratio are the negative factors for this stock. Promoters hold 74.80 % stake.

On technical charts, RSI of 76.69 indicates bullishness while MACD has witnessed a bullish crossover, ADX of 31 indicates uptrend while stochastic indicator is moving towards oversold territory. It is trading well above 50 DMA of 68.86.

Target: 110    Duration : 3 weeks     Strategy: Hold/Sell

LG Balakrishnan & Bros Ltd (BSE: 500250  NSE: LGBBROSLTD) Category: Small Cap

LG Balakrishnan & Bros was founded in 1937 as a transport operator and has become a leading automotive components supplier. It is the first Indian company to supply timing chains to 4 wheeler OEMs in India and abroad, leading exporter to US, it is also the No.1 OEM supplier of drive chains with 70% market share and 50% replacement market. It also makes hot, warm and cold forgings for all 2 Tier OEMs. It is a leading fine blanking manufacturer having about 25 fine blanking presses.

autoancillaries1It has posted a net profit of 17.02% in June quarter at Rs 11.13 cr while sales rose 10.74% to Rs 279.04 cr. Earnings per share has risen to Rs 7.09. On a returns perspective 24.98% monthly, 15.16% quarterly and 43.17% semi-annual is above peer average and quite impressive.

It fares well on return on equity at 13.81% and net profit margin of 5.18. Liquidity and cash flow issues haunt the otherwise well performing company. Promoters hold 47.65% stake. PE of 22 indicates moderate pricing by market.

On technical charts, RSI of 80 indicates bullish overbought position while MACD line has witnessed a bullish crossover and ADX of 28.75 indicates uptrend and stochastic indicator is also in overbought territory.

Target: 925    Duration: 3 weeks   Strategy: Hold/Sell

Summary

The auto components industry is expected to grow at a rate of 8-10% in 2017-18 based on higher localisation by OEMs and strong export growth is expected to raise the industry turnover to US $100 bn by 2020. From 2000-16 period, foreign direct investment in this sector was recorded at US $15.80 bn.

The government has been very supportive with its Automotive Mission Plan 2006-2016 and the auto components industry is set to become the third largest in the world by 2025. Evolution of electric and hybrid cars gives new opportunities and challenges for the components industry. Hence, from the investment perspective, having one or two top performers in the portfolio will add value in the medium term.