Clutch Auto

Given the signs of gradual recovery in the commercial vehicles segment investors with a long-term horizon can consider buying the stock of Clutch Auto at Rs 39.30.

Factors such as improving industrial production numbers, thrust on highway and infrastructure projects and orders for new buses under the JNNURM programme, suggest that the recovery in commercial vehicle (CV) sales may sustain over the medium term. Trading at a price-earnings ratio of 11 times, Clutch Auto appears well-placed to ride on the CV revival, given its significant exposure to this segment.
Product offering

Clutch Auto is India’s largest manufacturer and exporter of clutches. Its product portfolio comprises clutch cover assemblies, clutch plates and discs, clutch repair kits, and other related components. With a well-diversified product portfolio, the company caters to CVs, passenger vehicles, tractors and earth movers. Clutch Auto derives about 35 per cent of its revenues from sales to original equipment manufacturers (OEMs), 45 per cent from aftermarket sales and the balance 20 per cent from exports.

The clutch is the most critical auto component that needs to be replaced frequently in a CV and has a replacement cycle of around 10-12 months, while the clutch cover assembly can be replaced once in four years. Clutch Auto has entered into co-branding agreements with some key customers to strengthen its foothold in the replacement market.

Betting on CV

The company focuses primarily on heavy-duty clutches for CVs and tractors. This forms 95 per cent of its sales with the balance 5 per cent coming from the passenger car segment. Tata Motors, Ashok Leyland, Escorts, Eicher, TAFE and Bajaj Auto are some of the major customers in this segment. Apart from slow revival in medium and heavy commercial vehicle (M&HCV) demand, visible growth in the light commercial vehicles (LCV) segment and tractors may help the company manage growth over the medium term.

While M&HCVs registered a decline of nearly 19 per cent between April and September 2009 compared to the corresponding previous period, LCVs have grown by 19.5 per cent. Tractor sales too have risen despite a poor monsoon. Mahindra and Mahindra, a key customer for Clutch Auto that commands a market share of 41 per cent in tractors, saw its tractor sales rise 42 per cent in this period. In the passenger vehicles segment, Maruti Suzuki is the major customer for the company.

Replacement demand

The replacement market’s contribution to the company’s total revenues has increased from 25 per cent in 2005-06 to 45 per cent now since they offer better margins compared to the OEM market.

Clutch Auto has a strong R&D expertise and technology knowhow which has helped it not only retain and expand its client base but also build a large replacement market. In FY-09, higher sales from replacement demand have helped the company offset the decline in offtake from the OEMs.

Reaching out to over 40 destinations, 85 per cent of Clutch Auto’s export revenues come from Latin and North America. The acquisition of the clutch division of Pioneer Inc Automotive Products in the US has enabled Clutch Auto expand its presence in the country. The export market is driven mainly by the replacement demand, with Navistar being the major OEM customer. The company plans to increase revenues from exports by 30 per cent by the next fiscal.
Financials

From 2003-04 to 2006-07 (the boom period for CVs), Clutch Auto registered a compounded annual sales growth of 25.6 per cent. Sales began to slide from the December quarter of 2007, and due to unfavourable market conditions that prevailed the whole of last fiscal, the company’s net sales fell by about 10 per cent, operating profits by 20 per cent and net profits plunged by 63 per cent on the back of higher interest cost and depreciation charges.

However, as demand for CVs picked up from the last quarter of 2008-09, Clutch Auto has been posting better numbers. In the first quarter of this fiscal, the company posted a sales growth of 17 per cent, boosting its operating profit by 31 per cent and net profits by 11 per cent.

Clutch Auto has improved its product mix to its operating profit margins by about 2 per cent to 15.5 per cent in June 2009. With prices of steel (primary production input) appearing relatively stable for the medium term, the company may not suffer the high input costs that prevailed in the first two quarters of last fiscal.

However, the biggest risk to the company’s outlook is any delay in the revival of the M&HCV segment. With a market cap of about Rs 62.9 crore, the stock’s micro cap status makes it quite vulnerable to market swings.

via BL