cmp: rs. 92.6 target: rs. 128 initiating coverage: buy...

January 7, 2013

Commercial Engineers & Body Builders Co Ltd

On the growth track

CMP: Rs. 92.6 Target: Rs. 128 Initiating Coverage: Buy

SKP Securities Ltd www.skpmoneywise.com of 13

Key Share Data

Face Value (Rs.) 10

Equity Capital (Rs. Crs) 54.9

Market. Capitalization (Rs. Crs) 508.77

52-w k High / Low (Rs.) 109.70/54.80

Average Yearly Volume 191900

BSE code 533272

NSE code CEBBCO

Reuters code CEBB.BO

Bloomberg code CEBB IN

Shareholding Pattern (as on 30th Sep. 2012)

Promoter55.81%

FII4.68%

DII12.89%

Others26.62%

Source: BSE

Financials (Rs. Cr.)

Particulars FY11 FY12 FY13E FY14E

Net Sales 216.7 468.6 683.0 886.8Sales Gr 18.5% 116.2% 45.7% 29.8%EBIDTA 17.5 70.2 124.7 169.8PAT 5.7 40.8 66.3 95.6PAT Gr -71.9% 615.9% 71.6% 42.6%EPS (Rs.) 1.0 7.4 12.1 17.4

Key Ratios

Particulars FY11 FY12 FY13E FY14E

Dividend(%) - - 20% 20%

P/E 89.3 12.5 7.7 5.3

MCap/Sales 2.3 1.1 0.7 0.6

Interest Cov 1.5 6.9 8.1 10.6

ROCE 7.0% 20.2% 26.7% 31.3%

RONW 4.0% 17.2% 23.2% 26.9%

EBITDM(%) 8.1% 15.0% 18.3% 19.2%

NPM (%) 2.6% 8.7% 9.7% 10.8%

Debt-Equity 0.2 0.4 0.4 0.3

1 Yr Price Performance CEBBCO v/s BSE Midcap

-0.5

0

0.5

1

CEBBCO BSE Midcap

Analyst: Prajwal Kanoi

Ph: +91 33 4007 7026 M: +91 9836907373

Email: [email protected]

Company Profile Commercial Engineers & Body Builders Company Limited (CEBBCO), promoted by Dr. Kailash Gupta and Mr. Ajay Gupta, produces vehicles and locomotive shells for diverse applications for road and railways transportation. CEBBCO is the industry leader in body manufacturing space producing bodies for most OEM’s in the country. In the railways segment, CEBBCO caters to rolling stock of the Indian Railways, refurbishes vehicles and manufactures components for coaches, locomotives and new wagons. CEBBCO also manufactures structurals for electrostatic precipitators and boilers. It has six manufacturing locations out of which four are in Jabalpur and one each in Indore and Jamshedpur.

Investment Rationale

Thrust on conversion of chassis sale to FBV sale by the Government

� The Government has provided a huge impetus for the conversion of chassis sale to FBV sale by providing for a 2% differential duty. The customer now has to pay a 12% duty on buying a FBV as against paying 14% duty on chassis purchased from the unorganized segment. This is likely to boost demand for FBV’s going ahead which will augur the topline of CEBBCO.

Presence in strategic locations

� CEBBCO has several locational advantages being close to both customers and suppliers. CEBBCO enjoys lower land, labour and overhead costs due to presence in such locations. The company is also able to reduce lead time and mitigate transportation costs.

Project Replica – High margin business

� CEBBCO, with its ‘Project Replica’, is the first organized player to enter replacement market for bodies. There is a huge opportunity in this market as it is estimated that there are 4 million vehicles on road (tippers is estimated at ~600,000 units) that need replacement. Further, as CEBBCO promoters are one of the largest dealers of Tata Motors, they have the potential to capture a wider replacement market. The entire replacement market is largely unorganized with high margins.

Benefits under TRIFAC policy

� CEBBCO will benefit from the TRIFAC policy of the state of Madhya Pradesh. This policy will directly benefit CEBBCO to the tune of Rs 230.0 crores (Rs 100.0 crores under CV expansion and Rs 130.0 crores for Railway project at Deori) over a period of 7 years.

Valuation

We recommend a BUY rating on the stock with an 18 months target price of Rs

128/share, implying an upside of ~38% from current levels. We have arrived at

the target price by taking the average of Rs 122/share at 7x FY14E EPS of Rs

17.4, Rs 122/share at 4.5x FY14E EBITDA of 169.8 crores and Rs 139/share

calculated using DCF method.



CEBBCO addresses the road

transport through Fully Built Vehicles

(FBV) and the rail opportunity

through wagon manufacturing.

According to SIAM, CV sales have

grown at ~15% CAGR during the

period 2005-06 and 2011-12. During

the period April-March 2012, CV

segment registered a growth of

~18% on a Y-o-Y basis.

Industry Overview

� The level of economic activity in India is directly proportional to its growth.

With India expected to deliver high rate of growth in the near term, we believe

that large volumes of goods will be transported from one place to another.

This will be either through road (growing segment with current share at 62%)

or through rail (economical and current share at 33%). CEBBCO addresses

the road transport through Fully Built Vehicles (FBV) and the rail opportunity

through wagon manufacturing.

Commercial Vehicles Industry

� India produces ~700,000 commercial vehicles (CV) annually. Out of these

~100,000 are passenger coaches and 50% of the remaining are small

commercial vehicles. The rest are the large, medium and heavy commercial

vehicles which forms the addressable market for CEBBCO.

Exhibit: Addressable market in FBV segment

Source: Company, SKP Research

Passenger

coaches

Small

commercial

vehicle

Large, medium

and heavy

commercial

vehicle

(addressable

market)

� According to SIAM, CV sales have grown at ~15% CAGR during the period

2005-06 and 2011-12. During the period April-March 2012, CV segment

registered a growth of ~18% on a Y-o-Y basis. During this period, Medium &

Heavy Commercial Vehicles (M&HCV’s) registered a growth of ~8% while the

Light Commercial Vehicles grew at ~27%.



With the gradual change in the

approach by the Original Equipment

Manufacturers (OEM’s) to sell FBV

rather than chassis, there lies huge

potential for growth for the

commercial vehicles body building

industry.

India is likely to have a demand of

~29,000 wagons every year.

� Currently, about 20% of the large, medium and heavy commercial vehicles

are converted from chassis into Fully Built Vehicles (FBV’s) by the organized

players. However, with the gradual change in the approach by the Original

Equipment Manufacturers (OEM’s) to sell FBV rather than chassis, there lies

huge potential for growth for the commercial vehicles body building industry.

� The selling of FBV’s (as against the chassis) by the OEM’s is beneficial to all

parties – the OEM’s, the customers and the government. Further, we expect

the CV industry to grow at a CAGR of 10-12% in the next five years. We

expect the current share of FBV’s in the commercial vehicles industry of 20%

to go up substantially in the next few years. The commercial vehicles body

building industry is likely to benefit from this going forward.

Wagon Manufacturing Industry

� With ~64,015 route kilometers and 1.4 million employees, Indian Railways is

one of the biggest railway systems in the world. It is the fourth largest freight

carrier in the world. Indian Railways is experiencing a massive shortfall in the

number of wagons to meet the demand arising out of freight traffic which is

expected to increase 8% annually. To meet this demand, it is expected that

railways will place significant orders for wagons going forward. This is likely to

give a thrust to the wagon manufacturing industry.

� According to Indian Railways Vision 2020 document, India is likely to have a

demand of ~29,000 wagons every year. This can be decoupled as

Exhibit: Growth in CV segment over the years Exhibit: Market Share of CV's among automobiles

Source: SIAM, SKP Research Source: SIAM, SKP Research

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,0002005-0

6

2006-0

7

2007-0

8

2008-0

9

2009-1

0

2010-1

1

2011-1

2

Nu

mb

er

of veh

icle

s

Commercial Vehicles

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

2005-0

6

2006-0

7

2007-0

8

2008-0

9

2009-1

0

2010-1

1

2011-1

2

Market Share



In order to capture the growing

opportunities in this segment,

CEBBCO is in the process of

increasing its capacity by 50% from

~22,000 FBV’s in FY12 to ~33,000

FBV’s in FY13E.

replacement demand (~9,000 wagons) and demand for new wagons. Further,

with the new freight corridor coming up, ~40% of the Indian wagon units will

need overhauling. This is likely to give the wagon manufacturing industry in

India a substantial boost.

Company Profile

� Commercial Engineers & Body Builders Company Limited (CEBBCO),

promoted by Dr. Kailash Gupta and Mr. Ajay Gupta, produces vehicles and

locomotive shells for diverse applications for road and railways transportation.

CEBBCO is the industry leader in body manufacturing space producing

bodies for most OEM’s in the country. In the railways segment, CEBBCO

caters to rolling stock of the Indian Railways, refurbishes vehicles and

manufactures components for coaches, locomotives and new wagons.

CEBBCO also manufactures structurals for electrostatic precipitators and

boilers. It has six manufacturing locations out of which four are in Jabalpur

and one each in Indore and Jamshedpur.

Business Overview

Fully Built Vehicles

� A Fully Built Vehicle (FBV) is a ready to use commercial vehicle for a specific

application. CEBBCO focuses on building FBV’s for Light Commercial

Vehicle (LCV) and Medium and Heavy Commercial Vehicle (MHCV).

CEBBCO is the industry leader in the FBV segment and is likely to benefit

from the stated policy of OEM’s to convert chassis sale to FBV sale. In order

to capture the growing opportunities in this segment, CEBBCO is in the

process of increasing its capacity by 50% from ~22,000 FBV’s in FY12 to

~33,000 FBV’s in FY13E. Some of CEBBCO’s clients in this segment are

Tata Motors, Ministry of Defence, Reliance Petroleum Ltd, Reliance

Industries Ltd and Ashok Leyland Ltd.

Wagon manufacturing and refurbishment

� In 2008, CEBBCO entered the wagon manufacturing and refurbishment

segment. CEBBCO manufactures components for locomotives, wagons and

coaches. They are also involved in upgradation and refurbishment of wagons.

CEBBCO has received RDSO approval and can bid for Indian Railway tender

for freight wagons. The main client of CEBBCO in this segment is Indian



The thrust by the Government to boost

FBV sales is likely to benefit all parties

– the customer, the Government and

the OEM’s.

Railways.

Power structurals

� CEBBCO manufactures structurals for electrostatic precipitators and boilers.

This business is currently small and is a play on India’s design and fabrication

expertise. CEBBCO possesses the requisite technical know-how using one of

the most stringent industry guidelines for products in this segment. This

business provides diversification helping the company to de-risk its business

model.

Exhibit: Segment sales


91%

92%

93%

94%

95%

96%

97%

98%

99%

100%

FY11 FY12

Power Railways FBV

Investment Rationale

Thrust on conversion of chassis sale to FBV sale by the Government

� The Government has provided a huge impetus for the conversion of chassis

sale to FBV sale by providing for a 2% differential duty. The customer now

has to pay a 12% duty on buying a FBV as against paying 14% duty on

chassis purchased from the unorganized segment. This is likely to boost

demand for FBV’s going ahead which will augur the topline of CEBBCO.

� The thrust by the Government to boost FBV sales is likely to benefit all

parties – the customer, the Government and the OEM’s. The customer

stands to benefit as they get full funding of the FBV (as against chassis

where they get funding only for chassis) and their vehicle starts generating

revenue from the day of purchase as against the time that the workshop

would take for conversion during which the vehicle would remain idle. The

Government benefits as most garages make vehicles which can be



CEBBCO has several locational

advantages being close to both

customers and suppliers. CEBBCO

enjoys lower land, labour and

overhead costs due to presence in

these locations. The company is also

able to reduce lead time and mitigate

transportation costs.

overloaded thereby reducing Governments investments in road infrastructure.

For the OEM’s, selling of a FBV vis-à-vis chassis results in higher revenues

and margins.

� Since, the conversion from sale of chassis to sale to FBV is likely to benefit

all parties concerned, this transformation is likely to be rapid. As CEBBCO is

an industry leader in the organized FBV segment, this will result in healthy

volumes for the company.

Presence in strategic locations

� The manufacturing facilities of CEBBCO are strategically located both close

to customers as well as suppliers. Jabalpur, where CEBBCO has four

manufacturing facilities, serves as a central location to major OEM hub

across India. CEBBCO has key clients in Indore and Jamshedpur where the

company has one plant each. CEBBCO is also located closely to suppliers of

steel (key raw material) based in Orissa and Jharkand.

Exhibit: Strategic locations


� CEBBCO has several locational advantages being close to both customers

and suppliers. CEBBCO enjoys lower land, labour and overhead costs due to

presence in these locations. The company is also able to reduce lead time

and mitigate transportation costs.



There is a huge opportunity in this

market as it is estimated that there are

4 million vehicles on road (tippers is

estimated at ~600,000 units) that need

replacement.

This policy will directly benefit

CEBBCO to the tune of Rs 230.0

crores

Project Replica – High margin business

� CEBBCO, with its ‘Project Replica’, is the first organized player to enter

replacement market for bodies. There is a huge opportunity in this market as

it is estimated that there are 4 million vehicles on road (tippers is estimated at

~600,000 units) that need replacement. Further, as CEBBCO promoters are

one of the largest dealers of Tata Motors, they have the potential to capture a

wider replacement market. The entire replacement market is largely

unorganized with high margins.

� The company had launched a pilot project in Q1FY13 which had received an

encouraging response. It is expected that the company will do a pan-India

launch in 2013-14. The company receives payment in advance for Project

Replica and no credit is given to customers, thus, ensuring healthy working

capital.

Benefits under TRIFAC policy

� CEBBCO will benefit from the TRIFAC policy of the state of Madhya Pradesh.

Under this policy, a subsidy is granted to the establishment in payment of

State Sales Tax, Central Sales Tax and Entry Tax to the extent of capital

investment made by the establishment. This policy will directly benefit

CEBBCO to the tune of Rs 230.0 crores (Rs 100.0 crores under CV

expansion and Rs 130.0 crores for Railway project at Deori) over a period of

7 years. We have not factored this benefit to CEBBCO in its valuation.

Exhibit: Expected cash flows under TRIFAC policy

Particulars FY13E FY14E FY15E FY16E FY17E

Total Estimated Benefit 30 35 40 40 40

Tax @ 32% 9.6 11.2 12.8 12.8 12.8

Post tax cash flows 20.4 23.8 27.2 27.2 27.2

WACC 12.9%

PV of cash flows 95.7

Per share Value 17.4




We have arrived at the target price by

taking the average of Rs 127/share at

7x FY14E EPS of Rs 18.2, Rs

125/share at 4.5x FY14E EBITDA of

169.8 crores and Rs 141/share

calculated using DCF method.

Key Concerns

Highly concentrated client base and revenue model

� CEBBCO has a highly concentrated customer base. A majority of its FBV

revenue comes from Tata Motors which makes the company’s fortunes

dependent on Tata Motors. Further, FBV’s account for a significant portion of

the company’s revenue. A downturn in the FBV industry may adversely

impact CEBBCO. Diversification of business by foraying into railways and

power structurals will help to provide stability to the company’s topline.

Increase in raw material prices

� The main raw material for CEBBCO is steel. Any increase in prices of steel

will adversely impact the company’s margins. However, the ability of the

company to pass the increase in raw material prices to its clients mitigates

this risk.

Valuation

� We recommend a BUY rating on the stock with an 18 months target price of

Rs 128/share, implying an upside of ~38% from current levels. We have

arrived at the target price by taking the average of Rs 122/share at 7x FY14E

EPS of Rs 17.4, Rs 122/share at 4.5x FY14E EBITDA of 169.8 crores and Rs

139/share calculated using DCF method.

Exhibit: Valuation

Valuation Methodology Basis Price Per Share (Rs)

P/E 7x FY14E EPS 122

EV/EBITDA 4.5x FY14E EBITDA 122

DCF WACC @ 12.9% 139

Target Price Average 128



One Year Forward P/E Band

Exhibit: One year forward P/E

Source: Capitaline, SKP Research

0

20

40

60

80

100

120

140

160

31/03/2011 9/2/2012 14/12/2012

Rs

/share

Price 2 3 4 5 6 7

One Year Forward EV/EBITDA Band

Exhibit: One year forward EV/EBITDA


0

100

200

300

400

500

600

700

800

900

31/03/2011 9/2/2012 15/12/2012

Rs c

rore

s

EV 2 2.45 3 3.5 4 4.5



One Year Forward P/B Band

Exhibit: One year forward P/B


0

20

40

60

80

100

120

140

31/03/2011 9/2/2012 14/12/2012

Rs/s

hare

Price 0.5 0.75 1 1.25 1.5 1.75

DCF Valuation

PV of projected cash flows (Rs. crores) 237.2

PV of terminal value (Rs. crores) 637.1

PV of all cash flows (Rs crores) 874.2

Less: Debt (Rs crores) 111.3

Value of equity (Rs crores) 762.9

No of shares outstanding (in crores) 5.5

Value per share (Rs) 139

Exhibit: DCF Assumptions

Terminal growth rate 2.0%

Risk free rate 8.1%

Cost of equity 15.8%

Cost of debt (pretax) 8.4%

Tax 28.1%

WACC 12.9%

Exhibit: DCF Valuation



Net sales is expected to grow at a

CAGR of 37.6% in FY12-14E period.

PAT margins are expected to grow

from 2.6% in FY11 to 11.3% in FY14E.

The company’s current ratio is

expected to improve from 2.6 in FY12

to 3.5 in FY14E. This can be partly

attributed to Project Replica where

work is carried on advance from

customers and no credit is given.

Financial Outlook

Exhibit: Net Sales and PAT Margins


0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

0.00100.00200.00300.00400.00500.00600.00700.00800.00900.00

1000.00

FY11 FY12 FY13E FY14E

Net Sales (LHS) PAT Margins

Exhibit: Current Ratio


0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

FY11 FY12 FY13E FY14E

Current Ratio



Financials (in Rs Cr)

Income Statement FY11 FY12 FY13E FY14E Balance Sheet FY11 FY12 FY13E FY14E

Net Sales 216.7 468.6 683.0 886.8 Share Capital 54.9 54.9 54.9 54.9

Growth 18.5% 116.2% 45.7% 29.8% Reserves and Surplus 162.4 203.2 258.5 343.1

Total Income 216.7 468.6 683.0 886.8 Net worth 217.3 258.1 313.5 398.1

Total Expenditure 199.2 398.4 558.4 716.9 Total Debt 46.1 111.3 121.2 128.6

Operating Profit 17.5 70.2 124.7 169.8 Deferred Tax Liability (Net) 1.2 8.5 8.5 8.5

Operating Profit Margin 8.1% 15.0% 18.3% 19.2% Total 264.6 378.0 443.2 535.2

Depreciation 3.9 6.4 17.2 19.5

PBIT 13.7 63.8 107.5 150.3 Fixed Assets 73.5 231.4 252.0 284.0

Interest 9.3 9.3 13.3 14.1 Investments 38.4 0.7 0.9 1.1

Other Income 2.9 2.3 3.4 4.4 Inventories 69.2 49.7 54.6 62.1

PBT 7.3 56.8 97.6 140.6 Sundry Debtors 30.6 103.7 109.3 115.3

Tax 1.6 16.0 31.2 45.0 Cash and Bank 26.0 5.7 15.1 33.6

PAT 5.7 40.8 66.3 95.6 Other Current Assets 0.0 1.5 0.0 0.0

PAT Margin 2.6% 8.7% 9.7% 10.8% Loans and Advances 89.4 74.6 109.3 144.2

Minority Interest 0.0 0.0 0.0 0.0 Total Current Assets 215.2 235.3 288.3 355.1

Net Profit after Minority Interest 5.7 40.8 66.3 95.6 Current Liabilities & Prov 62.4 89.4 98.0 105.0

Shares Outstanding 5.5 5.5 5.5 5.5 Miscellaneous Expenditure 0.0 0.0 0.0 0.0

EPS 1.0 7.4 12.1 17.4 Total 264.6 378.0 443.2 535.2

Cash Flow Statement FY11 FY12 FY13E FY14E Ratios FY11 FY12 FY13E FY14E

Profit before tax 7.3 56.8 97.6 140.6 Valuation Ratios

Add: Depreciation, Interest & Other Exp 10.8 14.1 30.5 33.7 P/E 89.3 12.5 7.7 5.3

Net Changes in WC, tax, interest -2.5 -14.1 -66.3 -86.3 P/BV 2.3 2.0 1.6 1.3

Cash Flow from Operating Activities 15.5 56.9 61.7 87.9 EV/EBITDA 28.0 8.7 4.9 3.5

Change in Fixed Assets -80.1 -157.1 -37.7 -32.7 EV/Sales 2.3 1.3 0.9 0.7

Change in Investments -37.7 37.7 -0.2 -0.2 Price/Sales 0.4 0.2 0.1 0.1

Intercorporate Deposits Given 0.0 -15.0 0.0 0.0 Dividend Yield 0.0% 0.0% 2.2% 2.2%

Change in Capital WIP 0.0 0.0 0.0 -18.8 Market Cap/Sales 2.3 1.1 0.7 0.6

Dividend Received 1.2 0.5 0.0 0.0 Earnings Ratios

Interest Received 1.1 1.4 0.0 0.0 OPM 8.1% 15.0% 18.3% 19.2%

Cash Flow from Investing Activities -115.5 -132.5 -37.9 -51.7 NPM 2.6% 8.7% 9.7% 10.8%

Issue of share capital 12.0 0.0 0.0 0.0 ROCE 7.0% 20.2% 26.7% 31.3%

Securities Premium Received 128.4 0.0 0.0 0.0 RONW 4.0% 17.2% 23.2% 26.9%

Change in Borrow ings -8.6 64.8 9.9 7.3 Interest Coverage 1.5 6.9 8.1 10.6

Interest Paid -9.3 -9.3 -13.3 -14.1 Balance Sheet Ratios

Dividend Paid 0.0 0.0 -11.0 -11.0 Current Ratio 3.4 2.6 2.9 3.4

Cash Flow from Financing Activities 122.5 55.5 -14.5 -17.8 Debt-Equity Ratio 0.2 0.4 0.4 0.3

Opening Cash Balance 3.4 26.0 5.7 15.1 Debtors Days 74 52 56 46

Change in cash and cash eq. 22.5 -20.2 9.4 18.5 Inventory Days 106 52 33 29

Closing Cash Balance 26.0 5.7 15.1 33.6 FA Turnover 3.7 2.4 2.9 3.3



The above analysis and data are based on last available prices and not official closing rates. SKP Research is also available on Bloomberg,

Thomson First Call & Investext Myiris, Moneycontrol, Ticker plant and ISI Securities

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INB/INF: 230707532, BSE INB: 010707538, CDSL IN-DP-CDSL-132-2000, DPID: 021800, NSDL IN-DP-NSDL: 222-2001, DP ID: IN302646, ARN: 0006, NCDEX: 00715, MCX: 31705, MCX-SX: INE 260707532

cmp: rs. 92.6 target: rs. 128 initiating coverage: buy...

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