Attractive Midcap Stocks

By Sanjay Chhabria

Autoline Industries Ltd (Rs 128)

(BSE Code- 532797 NSE Code- AUTOIND)

(P/E- 7.6, Market Cap - 156 cr., FY10 Sales- Rs451 cr)

Dhampur Sugar Mills, Autoline Industries

Dhampur Sugar Mills, Autoline Industries

IFSL - Autoline Industries Visit Note

Autoline Industries Ltd. (AIL), a Pune-based fast growing supplier of sheet
metal components and assemblies has been growing at CAGR 65% over the last
four years. We expect the company to grow at a CAGR of 55% in the next two
years, on the back of strong order book and export potential. Presently,
the stock quotes at a PER of 11.7x FYo8E. We believe that at the current
price, the stock is fairly valued.

Though the company has shown robust growth and the management is confident
of growing at the same pace going forward, we are slightly cautious on
growth prospects on back of rising interest rates & softening of demand in
the overall auto sector compared to what was seen in FY07. At CMP of Rs210
the stock is fairly valued as it is trading at 11.7x FY08E earning. At
present we do not have a rating on this stock.

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Various Reports

ISEC - Media - Q3FY07Cygnus - MediaAutoline IndustriesInvestsmart - CNN-IBNThanks Reena

Autoline Industries IPO

Autoline Industries supplies complex sheet metal assemblies and sub-assemblies to Tata Motors, Bajaj Auto, Kinetic Engineering, Mahindra & Mahindra, Walker Exhaust and Fiat India. The company is the single-source supplier of load bodies for Tata Ace mini truck. It has entered into an arrangement with Stokota Engg, the Indian subsidiary of Stokota NV, Belgium, for supply of tippers, tipper trailers, tankers, cement bulkers, and garbage extractors.

The promoters of Autoline Industries are Vilas Lande (sitting MLA from Haveli constituency in Pune), Shivaji Akhale, Sudhir Mungase, M Radhakrishnan and his wife.

To modernize and upgrade the existing facilities at Chakan, set up a new manufacturing unit at Chankan, expand the UAE joint venture operation, expand facilities in design engineering unit, establish corporate office, make strategic acquisition and meet issue expenses, Autoline Industries is issuing equity shares through the 100% book building process to raise Rs 75 crore. .

Strengths

* Major customer Tata Motors is doing well, specially the Ace LCV model for which the Autoline Industries is the single-source supplier.

* The integrated inhouse facilities of the company cater from design engineering stage to delivery of the final product.

* Positioned as a leading provider of services to overseas manufacturers looking for outsourcing developmental work and design engineering services, the company is expanding the capabilities of its design-engineering unit to supply offshore development and manufacturing (ODM) services to foreign companies.

Weakness

*The cost-reduction targets stipulated by Tata Motors, accounting for 82% of Autoline Industries’ sales, are likely to put pressure on the profit of Autoline Industries. The 9.8% operating profit margin in the latest eight-month period is lower than 11.9% in FY 2006.

Valuation

In the past year, Autoline Industries has issued shares on preferential basis at Rs 50 to Rs 130 per share. At the current offer price band of Rs 200 - Rs 225, the annualised EPS for the eight months ended November 2006 on post-issue equity works out to Rs 10.6 to Rs 10.4, and PE 19.2x – 21.3x. The TTM PE of auto ancillary industry is 13.8x.

Emkay - Morning Notes - Autoline Industries

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Autoline Industries: Invest at cut-off

An investment at the cut-off price can be considered in the initial public offering of the Pune-based auto component company, Autoline Industries. In the price band of Rs 200-225 at which the offer is being made, the stock would trade at a price-earnings multiple of 13-15 times the expected per-share earnings (on an expanded equity) for FY-08.

We believe the valuation to be reasonable in the light of the steady improvement in operational metrics and a good return on equity that Autoline has achieved in the recent past.

Investors can bid at the upper end of the price band. Should the discovered price be lower, investors would be allotted shares and also receive a refund of the amount paid in excess of the discovered price.

Offer background

Funds raised through the issue will be used to upgrade and expand Autoline's Chakan facility in Pune; set up another manufacturing facility at the same location; relocate and consolidate a couple of smaller units; establish a corporate office; fund acquisitions, and provide long-term working-capital resources.

Investment rationale

Autoline mainly supplies components to both two- and four-wheeler makers; its customers include Tata Motors, Bajaj Auto, and Mahindra and Mahindra.

Tata Motors, which buys components for passenger cars and commercial vehicles, is Autoline's largest customer accounting for about 85 per cent of revenues in FY-06.

From a turnover of Rs 51 crore in FY-04, Autoline's revenues have scaled up to Rs 118 crore (for the eight months of the ongoing fiscal). The sharp acceleration in topline also coincides with the success enjoyed by Tata Motors' Ace minitruck, for which Autoline is the single-source supplier of load bodies.

A part of the funds raised through the IPO would be used to raise load body capacity to about 450 per day by the end of this fiscal. With demand for Ace likely to remain robust, we believe it should add some zip to Autoline's financials.

Autoline has tried to diversify operations by acquiring a majority stake in an outfit that specialises in design engineering software; entering into a joint venture in the UAE for manufacturing products for the replacement market; and tying up with the Indian arm of Stokota of Belgium for the supply of heavy duty lead bodies.

These operations are relatively insignificant at the current juncture. Over the medium term, however, they should enable reduction in client concentration.

Over the past three years, Autoline's operating margins have improved steadily, from 6 per cent in FY-04 to about 10 per cent this fiscal. The margin picture is complemented by an improving return on equity, which has trebled from under 10 per cent in FY-04 to over 30 per cent in FY-06, an added positive from an investor standpoint.

Risks

The key risk to our recommendation is Autoline's dependence on a single customer for a chunk of its revenues, the inability to pass on escalating raw material costs to the end customer and a slowdown in the automobile industry as a whole, which would directly hurt the fortunes of players in the components business.

Offer details

Autoline intends raising Rs 75 crore through the book-built route by offering shares in the Rs 200-225 band. BOB Capital Markets is the book running lead manager to the issue, which opens tomorrow (January 8) and closes on Friday (January 12).