Company details
- Price target: Rs1,550
- Market cap: Rs 2,280 cr
- 52 week high/low: Rs1,373/770
- NSE volume: 2,415
(No of shares) - BSE code: 520056
- NSE code: SUNDRMCLAY
- Sharekhan code: SUNCLA
- Free float: 0.38 cr
(No of shares)
- The Q2FY2007 results of Sundaram Clayton Ltd (SCL) are slightly below our expectations due to a marginal fall in the company’s operating profit margin (OPM) owing to high raw material prices.
- The net sales for the quarter rose by 34.1% to Rs203.4 crore. The revenue growth of both the air-brake and the die-casting divisions remained strong during the quarter.
- The OPM declined by 100 basis points to 14.6% primarily due to a rise in the price of the raw materials, particularly non-ferrous metals. Consequently, the operating profit grew by 25.6% to Rs29.6 crore for the quarter.
- The other income, as expected, was higher at Rs13.8 crore due to the dividend income received from the subsidiaries. Stable depreciation charge and taxes led to a 58.3% growth in the net profit to Rs23 crore.
- The value of SCL''s total investment in the group companies works out to Rs950 per share. While computing SCL''s value, we have assumed a 75% discount to the company''s total investment. After adjusting for the same, the SCL stock is currently trading at around 12.6x its stand-alone FY2008E earnings and at 10.2x its stand-alone FY2008E earnings before interest, depreciation, tax and amortisation (EBIDTA). We maintain our Buy recommendation on the stock with a price target of Rs1,550.
Strong top line growth
The net sales for the quarter exceeded our expectations, growing at 34.1% to Rs203.4 crore. The growth in both the air-brake and die-casting divisions remained strong for the quarter. The revenues from the air-brake division stood at Rs114.8 crore as against Rs99.7 crore in Q2FY2006, marking a growth of 15.1% year on year (yoy). The die-casting division continued to perform brilliantly as its revenues increased by 70.3% from Rs52.0 crore to Rs88.6 crore this quarter.
The company continued its strong growth in exports with the export revenues reaching Rs38.4 crore (rising by 75.2% yoy). During this year, the company had won an export contract from the global automobile major Volvo for the supply of engine and transmission castings for trucks. The revenues from this order are expected to touch Rs60 crore in the next two years.
SCL continues to be on the look-out for newer clients. Last quarter it added a new customer, Asia Motor Works, to its air-brake division. At the moment, it has a strong client list with orders from automobile majors like Tata Motors, Ashok Leyland, Honda Siel Cars, Sona Koyo Steering, Tata Holset, Ford India and Visteon.
Higher input costs affect margins
The OPM declined by 100 basis points yoy to 14.6% and was stable on a sequential basis. The margins were affected as a result of a rise in the raw material cost, which rose from 48.6% to 54.4% as a percentage of sales. However, the sharp rise in the input cost was offset by the savings on the employee cost and other operational efficiencies.
The other income at Rs13.8 crore was higher for the quarter compared with Rs7.2 crore last year, as the dividend income was accounted for during the quarter. Stable interest and depreciation charges helped the company to register a growth of 58.3% in its net profit to Rs23 crore.
Looking at the first-half numbers, the margins have remained stable at 14.6% in comparison with last year. However, we expect the margins to improve further in the subsequent quarters because of (a) price hike due from its original equipment manufacturer customers, particularly Tata Motors; and (b) higher exports contribution.
Capacity expansion plans for the year
For FY2007, SCL has lined up a capital expenditure (capex) plan under which Rs48.63 crore has been earmarked for the air-brake division and Rs75 crore for the die-casting division. The capex would be used for capacity expansion and new product development. SCL plans to increase its casting capacity to 50,000 tonne from the current 24,000 tonne. The company has increased its capex in both the divisions, which has increased its interest cost.
ABS—a huge opportunity
The regulations regarding the usage of anti-lock braking system (ABS) in commercial vehicles (CVs) are expected to be implemented soon. We are of the view that this should trigger a huge replacement demand in case the usage of ABS is made mandatory in CVs. SCL has already given samples of the product to CV majors, Ashok Leyland and Tata Motors. The cost differential between an ABS and an air brake is in the range of Rs30,000-35,000 per vehicle since the margins in the ABS are higher than those in the conventional braking systems. This should further help the company to post better margins going forward.
Outlook and valuations
We believe that SCL would benefit from the buoyancy in the country''s CV industry. The shift from hydraulic brakes to air brakes that is expected to take place in the CV industry augurs well for SCL. Also, there is a huge outsourcing potential considering that WABCO is looking for a low-cost producer of brakes. Considering all these factors we maintain our positive outlook on the company.
We are marginally increasing our sales estimates for FY2007 due to higher-than-expected revenue growth from the domestic air brakes sales and strong sales registered by the die casting division. However, the gains from the same would be offset by slightly lower margins and higher interest costs as a result of increased capex during the year.
SCL has a huge investment portfolio with an investment value of Rs950 per share. It holds 56.8% in TVS Motors (8.8% directly and 48% indirectly through its 100% subsidiary Anusha Investments. In valuing the company we have assumed a 75% discount to the total investment value per share. After adjusting for the investments, the stock is currently trading at around 12.6x its stand-alone FY2008E earnings. We maintain our Buy recommendation on the stock with a price target of Rs1,550.