Jay Bharat Maruti

Now that sales of passenger cars are back on track, investors can consider accumulating the stock of Jay Bharat Maruti, an auto ancillary company whose single largest customer is Maruti Suzuki. Trading at Rs 47 (discounting its trailing four quarter earnings by eight times), JBM appears a safe bet given the stable prospects for Maruti Suzuki.
Maruti’s pivotal role

Jay Bharat Maruti, in which Maruti Suzuki holds a 29.3 per cent stake, is in the business of making body-in-white (BIW) parts and assemblies, rear axles, fuel neck fillers, mufflers and other components for automobile OEMs (original equipment manufacturers). About 65 per cent of the revenues come from BIW parts. BIW refers to the stage when the car body sheet metal (including doors, hoods and deck lids) has been assembled but the components (chassis, motor) and trim (windshields, seats, upholstery, electronics, etc) are notdone. JBM supplies parts to all models of Maruti Suzuki. This apart, the company also supplies to Honda Motorcycles and Scooters India, Eicher Motors and Mahindra and Mahindra.

After facing a rough patch in the third quarter of last fiscal, Maruti Suzuki swiftly returned to the growth path from January 2009. Passenger vehicle demand for Maruti has seen resurgence in recent months with easier availability of credit, payment of the first tranche of Sixth Pay Commission, strong rural and semi-urban demand, good festive demand and expanding exports to European countries, driven partly by the regulatory push for compact cars. Maruti Suzuki’s unit sales are up by 30 per cent since April 2009, relative to last year’s numbers.

The withdrawal of incentives to buy new cars offered by European governments (a scheme which is the major propeller of A-Star’s sales in these countries), may pose a risk to JBM’s volumes, post-December. However, initiatives by Maruti to expand markets in Latin America, West Asia and Australia may help partially counter the decline in exports to Europe. The domestic market too continues to offer good scope for growth, with Maruti’s recent launches such as A-Star and Ritz doing well. What is positive, is Maruti’s leadership in the A2 or the hatchback segment, which is expected to post comfortable volumes growth.

In the last fiscal, JBM commenced operations in its third plant in Maruti Suppliers Park at Manesar, which rolls out Swift, A-Star SX4 and Dzire. The facilities at the new plant include a press line, axle manufacturing unit and a paint shop.
Financial prospects

JBM’s performance usually follows that of Maruti Suzuki. Until FY-08, JBM registered an annualised sales and profits growth of 17 per cent and 15 per cent respectively. However, the recently-concluded fiscal witnessed some moderation. The company saw its 2008-09 sales and operating profits grow by 5 per cent and 12 per cent year-on-year. The commissioning of a new plant resulted in higher depreciation and led to a 34 per cent decline in net profits.

With softening excise duty structure, input costs and depreciation rates, JBM managed to expand its operating profits and net profits by 23 per cent and 77 per cent respectively in the September 2009 quarter. Sales remained flat due to high stocks of inventory with Maruti Suzuki; but this may ease from the forthcoming quarters. Stable prices of domestic steel (a primary input material) in the medium term may also be a positive.
Concerns

Though the business of JBM is highly leveraged on Maruti’s performance, JBM has not been able to deliver the kind of growth or stock market returns Maruti has. This is because JBM operates on thin margins (8-9 per cent) endemic to the auto components business. Quite often, the vehicle manufacturer dominates the scene and the component supplier has to negotiate long-term contracts at tight margins. That apart, being a small-cap stock, JBM is quite vulnerable to market corrections.

via BL