Federal-Mogul Goetze (India)
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs559
Current market price: Rs385
The Mogul of the rings
Key points
- Leader in critical auto components: Federal-Mogul Goetze India (FMGI) is a leading supplier of piston and piston rings to OEMs across vehicle segments. It owns a 65% share of the OEM market and enjoys 70-80% penetration in the CV and tractor segments. The CV industry continues to grow at above 30% in FY2007 and the strong double-digit growth rate is expected to sustain in FY2008. FMGI is also set to ride the wave of dieselisation of Indian cars. It will be the 100% supplier for Maruti Udyog’s soon-to-be-launched diesel Swift.
- Revamp over, Federal-Mogul gains control: FMGI turned profitable in Q2CY2006, as it restructured and cleaned up its balance sheet over the first and second quarters of 2006. As its operations stabilised under parent Federal-Mogul's new systems, it reported a 14.2% EBITDA margin in Q3CY2006 against 9.1% in Q2CY2006.
- Huge potential for outsourcing: Federal-Mogul has identified India as a low-cost manufacturing location and is shifting ten manufacturing lines to FMGI's Patiala plant. The resulting outsourcing opportunity is expected to boost FMGI's exports. The export benefits are expected to begin accruing as early as from Q1CY2007, with the company building scale from that point onward.
- Attractive valuations as compared with its peers: FMGI looks attractively valued as compared to the Tier-I auto-component companies. We think the lower valuations are not justified, considering the strong growth prospects on the back of the buoyancy in its domestic business, rising dieselisation of cars and the huge outsourcing opportunity. At the current market price of Rs385, the stock discounts its CY2008E earnings by 12.4x and trades at 7.5x CY2008 EV/EBIDTA. We recommend a Buy on the stock with a price target of Rs559.