reaping fruits of expansion buy - markets mojo€¦ · august 10, 2018 wealth research initiation...

Centrum Wealth Research is also available on: Bloomberg: CBWM <GO>, Thomson Reuters, Capital IQ and Factset

Please refer to important disclosures/disclaimers inside

Wealth Research August 10, 2018

Initiation PPAP Automotive Ltd

Reaping fruits of expansion Buy

PPAP Automotive Ltd (PPAP), established in 1978 is a leading manufacturer of Automotive Sealing Systems and Interior and Exterior Automotive parts in India. It is the single biggest supplier of sealing systems to Maruti Suzuki (MSIL), Honda Cars India, General Motors India, Toyota Kirloskar Motor, Renault Nissan India, Tata Motors, Ford India and Mahindra and Mahindra (M&M). It has a technical collaboration with Tokai Kogyo Co, Japan for Automotive Sealing System and Nissen Chemitec Corporation, Japan, for Injection Molded Products. PPAP has its five plants located in Delhi, Noida, Pathredi in Rajasthan & Chennai. Strong growth seen in demand for MSIL’s vehicles which account for 48% of PPAP’s revenues would lead to robust demand for the company’s products. The addition of new clients like SML Isuzu and Hyundai could boost the topline growth in the coming years. The company has completed all its major capex plans and established/shifted its plants near to its client’s plants. As the utilization of these new facilities ramps up, revenues would keep rising. Working capital cycle is also likely to reduce, led by lower inventory levels and shorter lead time. With access to global technology and leadership in sealing systems we expect a strong growth in topline and margin expansion in the coming years.

Valuation and View: We estimate PPAP Automotive to post topline CAGR of 15% and bottom-line CAGR of 21% over FY18-FY20E. We expect the company to report EBITDA Margin of 22% by FY20E versus 21.3% in FY18 (+70bps). Given the growth prospects, we recommend a “BUY” on the stock, valuing it at 16x FY20E EPS and arrive at a price target of ₹653 (28% upside).

Strong OEM ties: PPAP has strong ties with Japanese and Indian OEMs forming ~85% of revenues of the company. The relationship spans over three decades with India’s largest PV manufacturer MSIL forming about 48% revenues. Client additions across automobile manufacturers like PVs, CVs, 2Ws are a step to de-risk client concentration.

Technical collaboration-an edge: PPAP has an edge over peers due to two decades of relationship with Tokai Kyogo, Japan for sealing parts and Nissen Chemitech, Japan since 2007 for Injection Molded Parts. Technical tie-up allowed PPAP to introduce profiles and parts by applying engineered plastics resulting in widening of product portfolio.

Strong improvement in EBIDTA margins: Conscious strategies to rationalize costs and improve local raw material (RM) sourcing content, judiciously opening capacities closer to Auto clusters across North, South and West India. FY18 clocked EBITDA Margin of 21% versus 18.8% reported in FY17. EBITDA Margins improved by 1160 bps over FY13 levels. We expect the Margin profile to improve driven by 1) better product mix; 2) improving overall equipment efficiencies; and 3) persistence towards cost optimization.

Capex behind and return ratios to improve: Over FY17 and FY18, the company spent more than ₹50 crore towards greenfield and brownfield expansions. Going forward, incremental capex requirements would be significantly lower and thus will entail efficiency in machine utilization. We estimate PPAP to report ROE/ROCE improvement from 15.5%/13.7% in FY18P to 18%/16.4% in FY20E backed by faster than expected capacity ramp-up and healthy operating performance.

Risk factors: 1) Raw material price fluctuation, 2) Forex volatility, 3) Client concentration risk as MSIL and Hyundai contributing ~80% of revenues, 4) Slower than expected launch of models tied-up with.

Key Data

Current Market Price (₹) 510

Target Price (₹) 653

Potential upside 28%

Sector Relative to Market Outperform

Stock Relative to Sector Outperform

Stock Information

BSE Code 532934

NSE Code PPAP

Face Value (₹/Share) 10.00

No. of shares (

Cr.)

1.40

Market Cap (₹ Cr.) 719

Free float (₹ Cr.) 259

52 Week H / L (₹) 723 / 281

Avg. Daily turnover (12M, ₹ Cr.) 0.62

Shareholding Pattern (%)

Jun-18 Jun-17

Promoters 63.8 63.6

Mutual Funds & FIs 0.1 0.2

FPIs 1.3 1.1

Others 34.8 35.1

1 year Indexed Price Performance

80

100

120

140

160

180

200

Au

g-17

Oct

-17

Dec

-17

Feb

-18

Ap

r-18

Jun

-18

Au

g-18

PPAP S&P BSE500

Price Performance (%)

1M 3M 6M 12M

PPAP -11.4 -7.1 -16.7 47.4

S&P BSE 500 5.3 3.9 5.8 13.5

Source: Bloomberg, Centrum Wealth Research

Sneha Prashant, Research Analyst

Financial Summary - Consolidated Y/E Mar (₹ Cr.) Revenue YoY (%) EBITDA EBITDA (%) Adj. PAT YoY (%) EPS (₹) P/E (x) EV/EBITDA (x) RoE (%)

FY16A 319 0.04 53 16.6 14 (81.2) 10.01 51.0 14.9 6.9 FY17A 345 8.3 67 19.3 28 103.2 20.35 25.1 11.6 12.9 FY18P 398 15.3 85 21.3 39 38.0 28.09 18.2 8.8 15.5 FY19E 453 14.0 98 21.6 48 21.8 34.20 14.9 7.3 16.7 FY20E 522 15.2 115 22.0 59 22.9 42.04 12.1 5.8 18.0

Source: Company, Centrum Wealth Research, P = Provisional

PPAP Automotive Ltd.

Centrum Broking Ltd. 2

Centrum Wealth Research

About the company

PPAP is a leading manufacturer of Automotive Sealing Systems, Interior and Exterior Automotive parts in India. The company's state-of-the-art manufacturing facilities are located in Noida (UP), Greater Noida (UP), Chennai (Tamil Nadu) and Pathredi (Rajasthan). The company was established in 1978 for the manufacture of custom made extrusion products. The company commenced the Automotive Parts Business in 1985 with the start of production of MSIL’s cars in the Indian market.

The company's core competence is in Polymer Extrusion based Automotive Sealing System and Injection Molded products. Over the years, PPAP has been continuously adding more and more products to its product range. In 2012, the company has ventured into EPDM Rubber based Automotive Sealing System by establishing a Joint Venture with its Technology Partner Tokai Kogyo Co. Ltd. - Japan. The company manufactures over 500 different products for its customers and continuously targets to achieve zero parts per million (ppm) in Quality and Delivery performance for all its customers.

Exhibit 1: Automotive Sealing Products Exhibit 2: Injection Products

Source: Company, Centrum Wealth Research

Key Management Personnel

Mr. Ajay Kumar Jain, Chairman and Managing Director - Has over four decades of experience in the auto component industry. He has served as the President of Honda Cars India Suppliers Club in the year 2011-12. He has served as the Vice President of Toyota Kirloskar Suppliers' Association from 2006 - 2015. Currently, he is the President of Toyota Kirloskar Suppliers' Association. Mr. Abhishek Jain, CEO and Managing Director – Has over 15 years work experience in the auto industry and is associated with the company in 2003. He has been an active executive of the Toyota Kirloskar Supplier Association for over 7 years. Currently, he is a member of the executive committee of the Honda Suppliers Club. Mr. Manish Dhariwal, CFO - Has over 20 years work experience and has previously worked with Lazard India, IL&FS and Group Mega. Member of Institute of Chartered Accountants of India.




Product profile:

Automotive Sealing Products Injection Molded Products

TPO/PVC Products Gas Assisted / Engineering Plastic products

Outer/Inner Belt Molding Door Trim / Door Lining Assembly

Windshield Molding Bumpers / Instrument Panels

Roof Molding Interior / In Capib products

Slide Rail Exterior / Under body products

Door Opening Trim A/B/C Pillar Garnish

Air Spoiler/Dampener Quarter Glass molding

Glass Run Channel Special Products

EPDM Products Door side protectors

Back Door Seal/Door Opening Seal/Trim Door Opening/Special Profiles


Technical partnerships with

Tokai Group for Automotive Sealing System (Plastic) and Toolings

JV with Tokai Group for Automotive Sealing System (EPDM Rubber and TPV)

Ichimiya Group for Injection Molded Products

Manufacturing prowess

PPAP has the capability to extrude materials of up to four different levels of hardness, according to customer specifications, alongside the ability to process engineering polymers like PVC, PP, ABS and TPO. Today, most of the tooling and machinery required for polymer extruded parts is manufactured in-house. Some of the products manufactured here include inner and outer belt moulding, door trim, windshield moulding, roof moulding, slide rails, glass run channel and other special profiles. These products are used as sealing systems in automobiles and to enhance the aerodynamics of the vehicle.

The company focuses on acquiring the latest technology like servo controllers, electric machines, QMC and magnetic platen to provide higher quality, cost effective products to its customers. These machines have been sourced primarily from the leading manufacturers like Toshiba, JSW, Fanuc, Mitsubishi, Toyo, Nissei etc.

PPAP has an integrated development centre, which designs products using the latest software and processes. It also has a validation and testing facility to validate the designs along with a tool manufacturing facility which makes all the tools required to manufacture its line-up of products. PPAP also has extrusion lines which are capable of processing various engineering polymers required to ensure rigidity and longevity. PPAP also has EPDM rubber extrusion lines and TPV glass run channel lines at their other plants located around the country. All the lines are fully automated and use cost effective technologies.

Global and Domestic automotive window and exterior sealing industry

The overall global automotive window and exterior sealing system market is estimated to grow at a CAGR of approximately 7% from 2017 - 2023.

Automotive Window and Exterior Sealing System Market, By Segmentation

On the basis of component type, the glass run channels are the most widely used due to the low cost of production. The plastic reinforced glass that is preferred in the automotive industry can be easily mass produced and the cost of production decreases exponentially as the volume of bulk production increases. The window sealant system is very effective in insulating the interior of the automobile from the onslaught of heat and dust particles, thus acting as thermal and physical insulator providing air tight protection to the vehicle interiors. However, the cost of production of seals is quite high. Additionally, seals of exact specifications need to be manufactured to meet specific requirements of the automobile window and chassis dimensions so that they can be installed correctly. On the basis of exterior seals, hood seals are not a necessity and hence, are installed as an added feature. The trunk and front windshield seals are most commonly used in the automotive manufacturing process.

Passenger Cars: A promising market due to the increase in high global production

Passenger cars are expected to constitute the largest share, in term of value, in the global automotive window and exterior sealing systems market. This can be attributed to the growing need of personal cars and private cab’s in the emerging economies. It has triggered the demand for sealing systems, from passenger car manufacturer side. The demand is expected to increase in developing and developed countries such as China, Japan, Germany and U.S.A, where major car manufacturers are located.

Asia-Pacific: Largest market for automotive window and exterior sealing systems

Asia-Pacific is estimated to account for the largest share, in terms of value, of the global automotive window and exterior sealing systems market in 2016. The region comprises some of the fastest developing economies in the world, including China, India,




and Korea. This has led to an increase in vehicle production volumes over the years, with OEMs catering not only to the domestic demand but to overseas demand as well.

Key Players

Some of the key players in the global automotive window and exterior sealing system market are Lauren Plastics, LLC (U.S.), Henniges Automotive North America, Inc. (U.S.), Saar Gummi Czech S.R.O. (Czech Republic), Magna International Inc. (Canada), Cooper-Standard Automotive Inc. (U.S.), Sumitomo Chemical Co., Ltd. (Japan), REHAU Incorporated (U.S.), Minth Group Limited (China), Hutchinson Sealing Systems, Inc. (U.S.), Standard Profil A.S. (Turkey), PPAP Automotive Ltd. (India), and Toyoda Gosei Co., Ltd. (Japan), among others.

Exhibit 3: Market segmentation

Source: Market Research Future Report (Aug-18), Centrum Wealth Research

Valuation Strong growth seen in demand of MSIL vehicles, which account for 48% of PPAP’s revenues, would lead to robust demand for the company’s products. The addition of new clients like SML Isuzu and Hyundai could boost the top line growth in the coming years. The company has completed all its major capex plans and established/shifted its plants near to its client’s plants. As the utilization of these new facilities ramps up, revenues would keep rising. Working capital cycle is also likely to reduce led by lower inventory levels and shorter lead time. With access to global technology and leadership in sealing systems, we expect a strong growth in top line and margin expansion in the coming years. We estimate PPAP Automotive to post top line CAGR of 15% and bottom-line CAGR of 21% over FY18-FY20E. We expect the company to report EBITDA Margin of 22% by FY20E versus 21.3% in FY18 (+70bps).

We believe the stock is a good from a long term perspective and we initiate coverage with a target price of ₹653, valuing it at 16x its FY20E EPS.

Exhibit 4: One Year forward P/E Chart

0

180

360

540

720

900

1080

1260

1440

Ap

r-1

3

Jul-

13

No

v-1

3

Ma

r-14

Jul-

14

No

v-1

4

Ma

r-15

Jul-

15

No

v-1

5

Ma

r-16

Jul-

16

No

v-1

6

Ma

r-17

Jul-

17

No

v-1

7

Ma

r-18

Jul-

18

No

v-1

8

Ma

r-19

Price (₹) 5.0 X 10.0 X 15.0 X 20.0 X 25.0 X

Source: Bloomberg, Centrum Wealth Research




Strong OEM ties

PPAP commenced supplies for the automotive business in 1985 with the launch of the first Suzuki cars in India under the Maruti brand name. Since then, the company has been associated with all the Japanese OEMs, which have operations in the Indian market.

PPAP’s esteemed customers include some of the marquee Indian OEMs like MSIL, Honda Cars India, Toyota Kirloskar Motors, Nissan India, General Motors India, Tata Motors, M&M and their associate companies. The company also exports its parts to Thailand, Japan, Mexico and UK through its prestigious customers.

The company endeavors to delight its customers with the supply of defect free products. Over the years, PPAP has built a strong relationship with all its customers and has been regularly applauded for its superior performance.

Exhibit 5: Strong clientele with long standing relationship

Customer Country of business Number of years of relationship

Maruti India >30

Honda Cars India >20

Thailand >4

GM India >12

Toyota India >12

Argentina <3

Venezuela <3

South Africa <3

M&M India >10

Tata Motors India >7

Mercedes India >6

Ford India >6

Nissan India >6

Europe >5

Mexico >5

Japan >5

Renault India >2

Brazil <2


De-risking its revenue model by adding new clients and entry into new segments

In FY16, PPAP successfully forayed into LCV and 2W space with on-boarding of SML Isuzu and Suzuki Motorcycles in respective segments for injection molded parts having relatively better realizations. Penetration into SML Isuzu opens up new opportunities like top supplier for small cars, ultra large bus lines in addition to LCVs and PVs. In FY17, PPAP commenced relationships for instrument panels (injection molded interior parts) to SML Isuzu’s LCV.

During FY17, the company also forged a partnership with Hyundai, India’s second largest PV manufacturer. Hyundai India is focusing on increasing localization of parts, which can be a big growth impetus for PPAP. Currently, Hyundai imports 90% of its components (sealing and injection molded parts). PPAP currently will be supplying sealing products for Hyundai’s Eon. Hyundai sources 100% of sealing parts for Eon from PPAP.

We expect this business to show strong revenue trajectory over FY18-20E.

Exhibit 6: Business share among key clients… Exhibit 7: New clients added…

44 4549 48

33

39

31 30

15

9 9 85 4 6 6

1 1 2 31 1 1 01 1 25

0

10

20

30

40

50

60

FY15 FY16 FY17 FY18

(% o

f re

ven

ue)

MSIL HCIL Nissan TKML TTML GM Others





Exhibit 8: Presence across models of some of the leading OEMs…

OEM Models Present in Products offered

Maruti Brezza, Baleno RS, New Swift Dzire, Ignis, etc Extrusion parts

Honda Cars CR-V, WR-V, City, BR-V, Brio, Jazz, etc Extrusion parts

TKML Innova Crysta, Fortuner Extrusion parts

Tata Motors Tigor, Tiago, Hexa, etc Extrusion parts

Renault Kwid Extrusion parts

Hyundai Eon Injection molded parts

HMSI All scooters Injection molded parts

Suzuki Motorcycles All bikes Injection molded parts

SML Isuzu LCVs Instrument panels

Bharat Benz LCVs Instrument panels


Strategically located plants

Further, PPAP has its plants strategically located across the key automotive clusters, which assures customer stickiness. Its plants are located in the key automotive hubs of Chennai (Nissan, Hyundai, Ford, Renault, Toyota, Isuzu, Ashok Leyland); Noida (MSIL, Honda); Pathredi, Rajasthan (MSIL, Honda); Viramgam, Gujarat (Suzuki, GM, TTMT, M&M) and Surajpur, UP (MSIL, Honda). Proximity to clients’ plants allows to maintain lean inventory, cost advantages by adhering to timely sourcing of raw material and also just-in-time supplies to OEMs.

Exhibit 9: Plants strategically located near marquee customers

Plants I & II: Extrusion facilityNoida, UP

Plant IV: Injection facilityPathredi, Rajasthan

Plant III: Rubber Extrusion & Injection facility Surajpur, UP

Plants VI: Greenfield plantViramgam, Gujarat

Plant V: Assembly & Extrusion facilityChennai, TN





Tie-ups with technology players keep PPAP ahead of competition

PPAP has developed strong technology alliances with Japanese companies in order to cater to the ever increasing demands of its prestigious customers. PPAP has entered into technical collaborations with Tokai Kogyo Co., Japan, in 1989 for its Automotive Sealing products and Nissen Chemitec Corporation, Japan, in 2007 for Injection Molding products. It is receiving the requisite support, as per the needs of the business.

In 2012, PPAP ventured into EPDM Rubber based Automotive Sealing System by establishing a JV with its technology partner Tokai Kogyo Co. PPAP also has a technology transfer agreement with Tokai Kogyo Seiki Co., Japan for manufacturing of tools & dies. With 85% of its sales coming from Japanese promoted companies, the clients are also comfortable with the technology. The technology partners provide PPAP with an edge over the competitors.

Exhibit 10: Strong tech tie-ups make PPAP’s innovations as critical as other components…

Company Country of operation Agreement Business Description

Japan Signed a technical tie up and services agreement with PPAP Automotive in 1989

Founded in 1947

Has global presence in USA, Thailand, Indonesia, China, Mexico, Vietnam

Amongst the leading players in the manufacture of Automotive Sealing Systems

Japan Entered a technical tie up with PPAP Automotive in 2007

Founded in 1951

Part of Ichimiya Group of Japan

Present in USA, Thailand, Indonesia, Singapore

A leading global player in Automotive Interior & Exterior Injection Molded Products


Sealing systems biz is protected from technical disruptions

PPAP set up a 50:50 JV with Tokai Kogyo Co. Ltd, Japan named as PPAP Tokai India Rubber Pvt. Ltd (PTI) with plant at UP, India. Initial capital infusion of ₹48.5 crore with the JV reported profit in its 3rd year of operations.

In order to survive in the Indian market, all OEMs have realized that they have to optimize on fuel efficiency and this is what they have been doing over the years. Efforts on the front of light weighting have gained significant traction due to OEMs’ evolving approach towards improving fuel economy. Items like working on the profile/size of a sealing system is one way of light weighting effort.

Parts such as petrol tanks, which were earlier made of sheet metal are now converted into plastic thereby offering considerable weight savings. Within sealing systems, PPAP makes glass-run channels, which are fitted on the window glasses sliding up and down. Conventionally, these parts were made from rubber. Now, it is made using Thermoplastic Vulcanizate (TPV) – a form of engineered plastic. This has helped in reducing the weight of the part by ~30%.

The company has introduced Thermoplastic Polyolefin (TPO) manufactured components, which has reduced weight of the vehicle and also enhanced aesthetics. PPAP has developed TPO Glass Run channel, which has helped in reducing vehicle weight and Carbon-di-oxide based emission.




Weight reduction technology using engineered plastics for door opening:

Use of thinner core metal with special processing to reduce weight of profile primarily find application in door opening

Foamed TPO Glass Run Channel using TPO (an engineered polymer) thus replacing rubber which was relatively heavy

Enabled weight reduction in Weather Strip Inner profile by changing material composition

Exhibit 11: TPV used for lightweight Exhibit 12: Glass Run Channel

Source: Company, Bloomberg, Centrum Wealth Research

With capex cycle behind; utilization will ramp up and return ratios will improve

PPAP is currently running at a consolidated capacity utilization (sealing + injection) of ~80%. The capacity utilization of sealing business is slightly higher at ~85% while that of its JV is even lower at less than 40%. PPAP has completed all its capacity expansion plans and does not foresee any additional capex requirements in FY19E/20E except for maintenance and ongoing capex (₹30-35 crore).

With completion of greenfield capacity expansion at Gujarat and Chennai, commercial supplies will commence soon and add up to the top line.

The location of injection molding plant with respect to customer is important in Injection molding business. Shipping these parts from Noida location to MSIL was non-competitive. Now company is in the process of setting of plants in Patherdi, RJ and Gujarat. With these plants, the company is looking to sell injection molded parts to MSIL as they are competitive.

PPAP was also utilizing its idle capacity for non-auto business where the margins are much lower. With the capacities now moving closer to the clients’ plants, the utilization is expected to increase in the auto business leading to h igher margins. We believe, return ratios will significantly improve led by increasing optimum equipment utilisation.

Exhibit 13: Peak capex is behind for PPAP… Exhibit 14: Low capex to lead to better capital efficiency

52

7

47

31

20

-

10

20

30

40

50

60

FY16 FY17 FY18P FY19E FY20E

(₹ c

rore

)

6.9

12.9

15.5 16.7

18.0

6.7

10.9

13.7

15.1

16.4

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0


(%)

ROE ROCE





Improving product and client additions along with cost savings aiding in industry leading EBIDTA margins

Over FY15-17 PPAP reported volume growth of 13% driven by rising demand from its OEMs. The company has consistently delivered ahead of industry topline growth.

Trend to continue driven by:

New OEMs in PVs, LCVs, 2W coming on-board

Completely Knocked Down (CKD) exports share to rise (as witnessed historically from 0% in FY13 to 10% in FY17)

EBITDA Margin expanded by 1411bps over last 5 years to 21.3% in FY18 from 7.2% in FY13. Focus on reducing RM imports and increasing localization aided EBITDA Margin expansion over FY13-18. RM Costs as a % of Net Sales reduced from 60% in FY13 to 50% in FY18. Other Expenses reduced by 220bps from 16.6% of Net Sales in FY13 to 12.7% in FY18. PPAP enjoys competitive manpower costs relative to industry due to its leadership position in the Automotive sealing systems business.

Exhibit 15: Revenue growth to continue… Exhibit 16: Industry leading EBIDTA margins…

319 345

398

453

522


-

100

200

300

400

500

600

(₹ c

rore

)

CAGR - 13.1%

53 67

85 98

115

16.6

19.3

21.3 21.6 22.0

15.0

17.0

19.0

21.0

23.0

40

60

80

100

120


(%)

(₹c

rore

)

EBIDTA - LHS Margin - RHS





Exhibit 17: Consolidated Quarterly Performance

Y/E Mar (₹ Cr.) 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19

Revenue 82 97 90 128 100

YoY Growth % -11.9 8.9 -5.3 12.4 21.4

Cost of Raw Material 40 47 43 68 50

% of sales 48.8 48.5 48.1 53.5 49.7

Personnel expenses 14 16 15 18 17

% of sales 17.4 16.1 16.5 14.1 17.4

Other Exp. 12 13 12 13 13

% of sales 14.8 13.8 13.0 10.0 13.0

EBIDTA 16 138 139 152 20

EBIDTA margin % 19.1 22.4 17.8 20.3 19.9

Depreciation 6 7 6 7 6

Interest 1 1 1 1 1

Other Income 1 1 1 0 0

PBT 9 14 12 21 13

Provision for tax 3 5 4 7 4

Effective tax rate % 34.6 34.6 34.5 34.2 30.0

PAT 6 9 8 14 9

YoY Growth % -63.3 -31.0 -52.1 -45.7 49.6

PAT margin % 7.2 9.5 9.1 11.0 11.0 Source: Company, Centrum Wealth Research

Risks

Client concentration: PPAP derives 48% of its revenues from Maruti Suzuki. MSIL products have been well received by the markets and the company has been able to maintain its market share. However, any slowdown in MSIL or diversification of vendors by MSIL could be detrimental to PPAP’s growth. In Injection molding, Honda is a large customer (~30% of revenues) and its growth rate lately has not been great.

Currency Risk - The company imports ~30% of its raw material used in the manufacturing of extrusion sealing parts. Therefore, the company’s profitability is sensitive to volatility in foreign currency exchange rates and is specifically, exposed to fluctuations in Japanese Yen.

Tooling revenues are not uniform across quarters: Tooling revenue is linked to the launch of a new car model and the revenue is hence lumpy. As model launch schedules shift, the revenue recognition will also shift. Tooling revenue is booked when the production of the car reaches mass level. Till such time, the tools are carried forward in inventory. Though PPAP keeps working on new models on a continuous basis, the booking of tooling revenue from the launch of these models is difficult to predict. In the quarter of sale of tools, the overall margins of PPAP could be better.




From the Technical & Derivative Desk

After the sharp rally in the calendar year 2017, the stock has started moving in a sideways direction.

The consolidation phase of last six months has resulted into formation of a ‘Channel’ pattern on daily chart.

Currently, the stock is rebounding from lower end of the channel, which also coincides with the ‘200 EMA’ on daily time scale (see exhibit).

Though momentum oscillator ‘RSI’ is indicating continuation in the ongoing sideways consolidation, risk reward is favourable on the long side.

Thus, one can buy the stock at CMP with stop-loss of ₹490 for the target of ₹615 – ₹635.

Exhibit 18: Technical Chart





Financials - Consolidated

Income Statement

Y/E Mar ( ₹ Cr) FY16 FY17 FY18P FY19E FY20E

Revenue 319 345 398 453 522

Growth % 0.04 8.3 15.3 14.0 15.2

Raw Material 170 180 199 228 262

% of sales 53.4 52.3 50.1 50.2 50.2

Personnel expenses 50 53 63 71 80

% of sales 15.6 15.4 15.9 15.7 15.3

Other Exp. 46 45 50 57 65

% of sales 14.4 13.0 12.7 12.5 12.5

EBIDTA 53 67 85 98 115

EBIDTA margin % 16.6 19.3 21.3 21.6 22.0

Depreciation 25 24 26 31 33

Interest 8 6 4 2 2

Other Income 1 2 3 3 4

PBT 22 39 57 67 83

Provision for tax 7 13 20 22 27

Effective tax rate % 34.8 33.6 34.4 32.0 32.0

RPAT 14 26 37 46 57

Share of profit/(loss) from associated companies

- 3 2 2 2

APAT 14 28 39 48 59

Growth % (81.2) 103.2 38.0 21.8 22.9

A PAT margin % 4.4 8.3 9.9 10.6 11.3


Balance Sheet

Y/E Mar (₹ Cr) FY16 FY17 FY18P FY19E FY20E

Share capital 14 14 14 14 14

Reserves & surplus 192 223 256 289 339

Shareholder's fund 206 237 270 303 353

Loan fund 60 50 32 30 27

Deferred tax liability 14 8 1 1 1

Total cap. employed 74 58 34 31 29

Net fixed assets 6 10 10 10 10

Investments 286 305 313 344 391

Cash and bank

Inventories 220 202 223 223 210

Debtors 2 49 49 50 50

Loans & Adv & OCA 1 4 1 28 79

Total current assets 39 23 32 32 37

Cur. liab. & prov. 40 49 55 58 67

Net current assets 26 26 26 27 28

Total assets 106 102 115 145 211

Source: Company, Centrum Wealth Research, OCA – Other current assets

Cash Flow

Y/E Mar (₹ Cr) FY16 FY17 FY18P FY19E FY20E

Net Profit Before Tax 22 39 57 67 83

Dep. and amortization 25 24 26 31 33

Others 6 16 10 (0) 31

Change in working capital (10) 13 10 (4) (8)

Tax expenses (7) (13) (20) (22) (27)

Cash flow from Ops 35 79 83 73 113

Capex (52) (7) (47) (31) (20)

Other investing activities 36 (47) 1 (1) -

Cash flow from Invest (14) (50) (46) (32) (20)

Proceeds from Eq. Cap. - - - - -

Borrowings/ (Repayments) (8) (16) (25) (3) (3)

Dividend paid (3) (4) (6) (7) (9)

Interest paid (8) (6) (4) (2) (2)

Cash flow from financing (20) (25) (36) (12) (14)

Net Cash Flow 1 3 1 28 78


Key Ratios

Y/E Mar FY16 FY17 FY18P FY19E FY20E

Return ratios (%)

RoE 6.9 12.9 15.5 16.7 18.0

RoCE 6.7 10.9 13.7 15.1 16.4

RoIC 6.7 10.0 14.3 16.3 20.1

Turnover Ratios (days)

Inventory 45 24 29 26 26

Debtors 46 52 51 47 47

Creditors 26 26 29 25 25

Fixed asset turnover (x) 1.0 1.1 1.2 1.2 1.3

Solvency Ratio (x)

Debt-Equity 0.4 0.2 0.1 0.1 0.1

Interest coverage 3.7 7.7 13.9 28.0 37.1

Per share (₹)

Adj. EPS 10.01 20.35 28.09 34.20 42.04

BVPS 147 169 193 216 252

CEPS 27.64 35.70 45.29 54.98 64.07

Dividend Ratios

DPS (₹) 2.0 2.3 3.8 4.4 5.5

Dividend Yield (%) 0.4 0.4 0.7 0.9 1.1

Dividend Payout (%) 0.9 0.9 1.3 1.4 1.5

Valuation (x)

P/E 51.0 25.1 18.2 14.9 12.1

P/BV 3.5 3.0 2.6 2.4 2.0

EV/EBIDTA 14.9 11.6 8.8 7.3 5.8

EV/Sales 2.5 2.2 1.9 1.6 1.3


.




Appendix

Disclaimer Centrum Broking Limited (“CBL”) is a full-service, Stock Broking Company and a member of The Stock Exchange, Mumbai (BSE), National Stock Exchange of India Ltd. (NSE) and Metropolitan Stock Exchange of India Limited (MCEI). One of our group companies, Centrum Capital Ltd is an investment banker and an underwriter of securities. As a group Centrum has Investment Banking, Advisory and other business relationships with a significant percentage of the companies covered by our Research Group. Our research professionals provide important inputs into the Group's Investment Banking and other business selection processes.

Recipients of this report should assume that our Group is seeking or may seek or will seek Investment Banking, advisory, project finance or other businesses and may receive commission, brokerage, fees or other compensation from the company or companies that are the subject of this material/report. Our Company and Group companies and their officers, directors and employees, including the analysts and others involved in the preparation or issuance of this material and their dependants, may on the date of this report or from, time to time have "long" or "short" positions in, act as principal in, and buy or sell the securities or derivatives thereof of companies mentioned herein. CBL or its affiliates do not own 1% or more in the equity of t his company Our sales people, dealers, traders and other professionals may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. We may have earlier issued or may issue in future reports on the companies covered herein with recommendations/ information inconsistent or different those made in this report. In reviewing this document, you should be aware that any or all of the foregoing, among other things, may give rise to or potential conflicts of interest. We and our Group may rely on information barriers, such as "Chinese Walls" to control the flow of information contained in one or more areas within us, or other areas, units, groups or affiliates of CBL. CBL and its affiliates do not make a market in the security of the company for which this report or any report was written. Further, CBL or its affiliates did not make a market in the subject company’s securities at the time that the research report was published.

This report is for information purposes only and this document/material should not be construed as an offer to sell or the solicitation of an offer to buy, purchase or subscribe to any securities, and neither this document nor anything contained herein shall form the basis of or be relied upon in connection with any contract or commitment whatsoever. This document does not solicit any action based on the material contained herein. It is for the general information of the clients of CBL. Though disseminated to clients simultaneously, not all clients may receive this report at the same time. Centrum will not treat recipients as clients by virtue of their receiving this report. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Similarly, this document does not have regard to the specific investment objectives, financial situation/circumstances and the particular needs of any specific person who may receive this document. The securities discussed in this report may not be suitable for all investors. The securities described herein may not be eligible for sale in all jurisdictions or to all categories of investors. The countries in which the companies mentioned in this report are organized may have restrictions on investments, voting rights or dealings in securities by nationals of other countries. The appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives. Persons who may receive this document should consider and independently evaluate whether it is suitable for his/ her/their particular circumstances and, if necessary, seek professional/financial advice. Any such person shall be responsible for conducting his/her/their own investigation and analysis of the information contained or referred to in this document and of evaluating the merits and risks involved in the securities forming the subject matter of this document.

The projections and forecasts described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. Projections and forecasts are necessarily speculative in nature, and it can be expected that one or more of the estimates on which the projections and forecasts were based will not materialize or will vary significantly from actual results, and such variances will likely increase over time. All projections and forecasts described in this report have been prepared solely by the authors of this report independently of the Company. These projections and forecasts were not prepared with a view toward compliance with published guidelines or generally accepted accounting principles. No independent accountants have expressed an opinion or any other form of assurance on these projections or forecasts. You should not regard the inclusion of the projections and forecasts described herein as a representation or warranty by or on behalf of the Company, CBL, Centrum group, the authors of this report or any other person that these projections or forecasts or their underlying assumptions will be achieved. For these reasons, you should only consider the projections and forecasts described in this report after carefully evaluating all of the information in this report, including the assumptions underlying such projections and forecasts.

The price and value of the investments referred to in this document/material and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide for future performance. Future returns are not guaranteed and a loss of original capital may occur. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice. We do not provide tax advice to our clients, and all investors are strongly advised to consult regarding any potential investment. CBL and its affiliates accept no liabilities for any loss or damage of any kind arising out of the use of this report. Foreign currencies denominated securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of or income derived from the investment. In addition, investors in securities such as ADRs, the value of which are influenced by foreign currencies effectively assume currency risk. Certain transactions including those involving futures, options, and other derivatives as well as non-investment-grade securities give rise to substantial risk and are not suitable for all investors. Please ensure that you have read and understood the current risk disclosure documents before entering into any derivative transactions.

This report/document has been prepared by CBL, based upon information available to the public and sources, believed to be reliable. No representation or warranty, express or implied is made that it is accurate or complete. CBL has reviewed the report and, in so far as it includes current or historical information, it is believed to be reliable, although its accuracy and completeness cannot be guaranteed. The opinions expressed in this document/material are subject to change without notice and have no obligation to tell you when opinions or information in this report change.

This report or recommendations or information contained herein do/does not constitute or purport to constitute investment advice in publicly accessible media and should not be reproduced, transmitted or published by the recipient. The report is for the use and consumption of the recipient only. This publication may not be distributed to the public used by the public media without the express written consent of CBL. This report or any portion hereof may not be printed, sold or distributed without the written consent of CBL.

The distribution of this document in other jurisdictions may be restricted by law, and persons into whose possession this document comes should inform themselves about, and observe, any such restrictions. Neither CBL nor its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information.

This document does not constitute an offer or invitation to subscribe for or purchase or deal in any securities and neither this document nor anything contained herein shall form the basis of any contract or commitment whatsoever. This document is strictly confidential and is being furnished to you solely for your information, may not be distributed to the press or other media and may not be reproduced or redistributed to any other person. The distribution of this report in other jurisdictions may be restricted by law and persons into whose possession this report comes should inform themselves about, and observe any such restrictions. By accepting this report, you agree to be bound by the fore going limitations. No representation is made that this report is accurate or complete.

The opinions and projections expressed herein are entirely those of the author and are given as part of the normal research activity of CBL and are given as of this date and are subject to change without notice. Any opinion estimate or projection herein constitutes a view as of the date of this report and there can be no assurance that future results or events will be consistent with any such opinions, estimate or projection.

This document has not been prepared by or in conjunction with or on behalf of or at the instigation of, or by arrangement with the company or any of its directors or any other person. Information in this document must not be relied upon as having been authorized or approved by the company or its directors or any other person. Any opinions and projections contained herein are entirely those of the authors. None of the company or its directors or any other person accepts any liability whatsoever for any loss arising from any use of this document or its contents or otherwise arising in connection therewith.

CBL and its affiliates have not managed or co-managed a public offering for the subject company in the preceding twelve months. CBL and affiliates have not received compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for service in respect of public offerings, corporate finance, debt restructuring, investment banking or other advisory services in a merger/acquisition or some other sort of specific transaction.

As per the declarations given by his/her, research analyst and the author of this report and/or any of his/her family members do not serve as an officer, director or any way connected to the company/companies mentioned in this report. Further, as declared by his/her, he/she has not received any compensation from the above companies in the preceding twelve months. Our entire research professionals are our employees and are paid a salary. They do not have any other material conflict of interest of the research analyst or member of which the research analyst knows of has reason to know at the time of publication of the research report or at the time of the public appearance.

While we would endeavor to update the information herein on a reasonable basis, CBL, its associated companies, their directors and employees are under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent Centrum from doing so.

Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compl iance with applicable regulations and/or Centrum policies, in circumstances where CBL is acting in an advisory capacity to this company, or any certain other circumstances.

This report is not directed to or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Centrum Broking Limited or its group companies to any registration or licensing requirement within such jurisdiction. Specifically, this document does not constitute an offer to or solicitation to any U.S. person for the purchase or sale of any financial instrument or as an official confirmation of any transaction to any U.S. person unless otherwise stated, this message should not be construed as official confirmation of any transaction. No part of this document may be distributed in Canada or used by private customers in United Kingdom.

The information contained herein is not intended for publication or distribution or circulation in any manner whatsoever and any unauthorized reading, dissemination, distribution or copying of this communication is prohibited unless otherwise expressly authorized. Please ensure that you have read “Risk Disclosure Document for Capital Market and Derivatives Segments” as prescribed by Securities and Exchange Board of India before investing in Indian Securities Market.




Disclosures under the SEBI (Research Analysts) Regulations 2014

Disclosure of Interest Statement

1 Business activities of Centrum Broking Limited (CBL)

Centrum Broking Limited (hereinafter referred to as “CBL”) is a registered member of NSE (Cash, F&O and Currency Derivatives Segments), MSEI (Currency Derivatives Segment) and BSE (Cash segment), Depository Participant of CDSL, SEBI registered Portfolio Manager and an AMFI registered Mutual Fund Distributor.

2 Details of Disciplinary History of CBL CBL has not been debarred/ suspended by SEBI or any other regulatory authority from accessing /dealing in securities market.

3 Registration status of CBL CBL is registered with SEBI as a Research Analyst (SEBI Registration No. INH000001469)

4 Whether Research analysts or relatives’ have any financial interest in the subject company and nature of such financial interest

No

5 Whether Research analysts or relatives have actual / beneficial ownership of 1% or more in securities of the subject company at the end of the month immediately preceding the date of publication of the document.

No

6 Whether the research analysts or his relatives has any other material conflict of interest No

7 Whether research analysts have received any compensation from the subject company in the past 12 months and nature of products / services for which such compensation is received

No

8 Whether the Research Analysts have received any compensation or any other benefits from the subject company or third party in connection with the research report

No

9 Whether Research Analysts has served as an officer, director or employee of the subject company No

10 Whether the Research Analysts has been engaged in market making activity of the subject company.

No

11 Whether it or its associates have managed or co-managed public offering of securities for the subject company in the past twelve months;

No

12 Whether it or its associates have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months;

No

13 Whether it or its associates have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months;

No

Member (NSE and BSE)

Regn No.: CAPITAL MARKET SEBI REGN. NO.: BSE: INB011454239 CAPITAL MARKET SEBI REGN. NO.: NSE: INB231454233

DERIVATIVES SEBI REGN. NO.: NSE: INF231454233 (TRADING & CLEARING MEMBER)

CURRENCY DERIVATIVES: MCX-SX INE261454230 CURRENCY DERIVATIVES: NSE (TM & SCM) – NSE 231454233

Depository Participant (DP)

CDSL DP ID: 120 – 12200 | SEBI REGD NO. : CDSL: IN-DP-CDSL-661-2012

PORTFOLIO MANAGER | SEBI REGN NO.: INP000004383 Research Analyst | SEBI Registration No. INH000001469 Mutual Fund Distributor | AMFI REGN No. ARN- 147569

Website: www.centrum.co.in | Investor Grievance Email ID: [email protected]

Compliance Officer Details:

Ashok D Kadambi (022) 4215 9937; Email ID: [email protected]

Centrum Broking Ltd. (CIN: U67120MH1994PLC078125)

REGD. OFFICE Address Bombay Mutual Bldg.,

2nd Floor, Dr. D.N. Road,

Fort, Mumbai - 400 001

Corporate Office & Correspondence Address Centrum House

6th Floor, CST Road, Near Vidya Nagari Marg,

Kalina, Santacruz (E) Mumbai 400 098.

Tel: (022) 4215 9000 Fax: +91 22 4215 9344

http://www.centrum.co.in/

reaping fruits of expansion buy - markets mojo€¦ · august 10, 2018 wealth research initiation...

Documents