Gabriel India

Investors with a two-to-three-year perspective can buy the shares of Gabriel India, a manufacturer of ride control products for the auto industry. From a 52-week-high of Rs 74 in mid-November, broader market volatility has pulled the price down to Rs 53, providing an attractive entry point for investors. At this price, the stock trades at a PE of 13 times its annualised per share earnings for the April-September 2010 period. The company's market leadership position and diversified clientele in the backdrop of a strong demand for automobiles give good visibility to earnings growth over the near to medium term. Gabriel India manufactures shock absorbers, struts and front forks. About 45 per cent of its revenues comes from two and three-wheelers and 30 per cent from the passenger car segment. Commercial vehicles, supplies to replacement markets and exports make up the rest. The company is a tier I supplier to leading OEMs (original equipment manufacturers) such as Maruti, Tata Motors, Ford, Toyota, M&M, Ashok Leyland, Honda, Bajaj and TVS.



Strong volumes

The robust growth witnessed by the auto industry since the turnaround in mid-2009 translates into promising volume outlook for Gabriel. Given the high base, there may be some moderation in auto sales, going forward. Nevertheless, a few aspects favour the company. One, it caters to all segments of the auto industry. Hence, a slowdown in one can be set off by growth in another. Two, the company has a diversified clientele. It is here that Gabriel scores over its competitor Munjal Showa, which derives over 70 per cent of its revenues from Hero Honda. Three, incremental volumes from planned launches by clients will keep the volume momentum going. The company had, in 2009-10, acquired businesses of new cars launched/to be launched by Volkswagen, Nissan and General Motors. It has also set up a dedicated plant at Sanand for supplying to the Nano, another high-volume product. In the commercial vehicles division, Gabriel has obtained orders for launches in the next two years from existing customers. Given the company's 85 per cent market share in supplies to the commercial vehicles segment alone, volume growth on this front too can be expected. Besides, Gabriel will also be a beneficiary of Honda's aggressive plans for the Indian two-wheeler market after the parting of ways with the Hero group.

This apart, the company targets exports to be 30 per cent of total sales over the next few years, from under 15 per cent currently. Gabriel supplies for some clients of its JV partners abroad and for the export models of A Star and Indica. It has also been roped in by M&M for its export models. The company provides components for the Logan in Iran and is exploring the possibility of supplying to the Logan in Brazil and other European countries. This focus on exports might bring in better margins as pricing power here tends to be higher than in domestic OE sales.

Focus on technology

Ride control products are highly sensitive to technology changes, as usage of better technology increases comfort for the rider. To cater to this, the company has a long-standing technical collaboration with KYB Corporation, Japan and KYBSE, Spain for two and four wheelers, ArvinMeritor for commercial vehicles and Yamaha Motor Hydraulic Systems of Japan for two-wheelers. Additionally, the company has evolved its in-house R&D facilities at Chakan and Hosur with capabilities for design and development. A new product to ensure a smooth ride at varying loads has been developed. Gabriel is also working on knowhow for advanced suspension systems.

Financials

For the half year ended September 2010, net sales stood at Rs 441 crore (up 36 per cent year on year) and net profits at Rs 15 crore (up 25 per cent). EBITDA margin was at 9 per cent. The company is targeting an EBITDA margin of 11 per cent for 2010-11 based on cost efficiencies. However, rising input costs may play spoilsport.