sandhar technologies -...
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Steep valuations make Risk‐reward unfavourable; Avoid
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Please refer to important disclosures and disclaimers at the end of the report
Sandhar Technologies
March 16, 2018
IPO Note
Saksham Kaushal [email protected] +91‐22‐66322235
Poorvi Banka [email protected] +91‐22‐66322426
Rating Avoid
Price Band Rs327‐332
IPO Fact Sheet
Opening Date Mar 19, 2018
Closing Date Mar 21, 2018
BRLMs ICICI Securities Ltd & Axis Capital Ltd
Issue Size Rs5.12bn
Issue Details Pre‐issue equity (m shares) 51.2
Fresh issue of shares (m shares)* 9
Offer for sale 6.4
Post‐issue equity (m shares)* 60.1
Post‐issue Market Cap (Rsbn)* 20
Share Holding (%) Pre‐IssuePost‐Issue*
Promoters 82.5 70.3
Public & Others 17.5 29.7
*Equity issuance calculated on upper price band
Objects of the Issue The Company will use the proceeds from the IPO(upto Rs2.25bn of total Rs3bn) towards debtrepayment and the rest will be used for generalcorporate purposes. The IPO comprises of fresh issue of 9mn shares for Rs3bn and offer for saleof 6.4mn shares by private equity investor GTIwhich forms ~12.5% of pre‐issue equity.
Sandhar Technologies Ltd is engaged in the manufacturing a diverse range of
automotive components and systems, primarily focusing on safety and security
systems for automobiles across segments. It is the market leader for two‐wheeler
locking systems & rear view mirrors as well as commercial vehicle rear view mirror
segment in India. It is also one of the largest manufacturers of operator cabins.
The company has 31 manufacturing facilities strategically located in automotive
hubs in India, 2 facilities in Spain & 1 in Mexico and is in the process of commissioning
another 5 plants in the next fiscal. The company supplies to 79 OEMs globally
including Hero, Ashok Leyland, Honda Cars, TAFE, Tata Motors, TVS, etc. In the last
12 years, the Company has received investment from two private equity investors,
namely Actis Group (entered in 2005 and exited in 2012) and GTI.
STL’s Revenue and EBITDA have grown at a CAGR of 9% & 12.4% respectively over
FY13‐17, with return ratios of ~13%. While revenue growth was muted at 7.6% YoY in
FY17, owing to motorcycle industry being flattish & Honda cars (forming ~8% of
revenue) seeing a decline, H1FY18 saw revenue growth of over 20% YoY on account
of STL's increasing share in scooters, Honda cars picking up again, construction
equipment business up 40% YoY, etc. The management expects H1FY18 growth
momentum to continue ahead, however, given the high dependence on certain
segments (two‐wheeler segment contributes ~58% of revneues) and customers (top 5
customers of the Company form ~70% of overall revenues), costs/risks associated
with new facilities/new segments to be commissioned next fiscal, etc., we are
skeptical of the same. The next trigger for growth is expected from segments fuel
injection systems, power filters and auto electronics (STL has 6 JVs for technological
support) but the company has not yet entered any of these aforesaid segments.
The Company is looking at raising Rs3bn through fresh issue, while there is an
additional OFS for 6.4mn shares by its private investor GTI. The post issue market cap
for the Company at the upper band works out to be ~Rs20bn. At the consolidated
level, the company will trade at steep valautions of 50x FY17 earnings, while at
FY18E too it is expensive at ~29x. Its closest competitors, Minda Corp and Minda
Industries, are currently trading at 26x and 40x FY18E, respectively. Given the
expensive valuations, low quality business, volatile past performance, high customer
concentration (HMCL forms ~30% of revenues) and unconvincing story, we
recommend ‘Avoid’.
Key financials FY14 FY15 FY16 FY17
Revenues (Rs m) 12,650 14,821 15,132 16,269
Growth (%) 9.1 17.2 2.1 7.5
EBITDA (Rs m) 1,163 1,392 1,413 1,458
PAT (Rs m) 332 384 338 396
EPS (Rs) 6.6 7.5 6.5 7.7
Profitability & Valuation FY14 FY15 FY16 FY17
EBITDA margin 9.2 9.4 9.3 9.0 RoCE 16.2 15.8 13.5 12.9
FCF (155) (117) 362 (171)
ROE 17.2 16.6 12.7 13.8
Source: Company Data
March 16, 2018 2
Sandhar Technologies
Exhibit 1: Issue Details
Company Sandhar Technologies Ltd
Profile
Sandhar Technologies Ltd is the customer centric component supplier; primarily catering to automotive Original Equipment Manufacturers (“OEMs”) and largely focused on safety and security systems of vehicles with a pan India presence and a growing international footprint. Company is the leader in the 2‐wheeler locking systems market and the commercial vehicle rear view market in India, and is one of the two largest companies catering to the commercial vehicle locking systems market and the two wheeler rear view market in India. Company’s customer portfolio consists of 79 Indian and global OEMs across various segments viz. Hero, TVS, Royal Enfield, Honda Cars, Tata Motors, Atlas Capco, Caterpillar and Forza Medi and others.
Offer Period Opens On : Monday, March 19, 2018
Closes On : Wednesday, March 21, 2018
Price Band Rs. 327/‐ to Rs. 332/‐
Bid Lot 45 Equity Shares & in multiple of thereafter
Issue Size Fresh issue for Rs3bn and Offer for sale of 6.4mn shares by Private equity investor GTI
Issue Size (In Rs) Rs5.12bn
QIB 50% of the Issue (Rs2.56bn)
NIB 15% of the Issue (Rs770mn)
Retail 35% of the Issue (Rs1.79bn)
Mode of Payment ASBA Mandatory (No Cheques will be accepted)
Registrar Link Intime India Private Ltd
Lead Manager ICICI Securities Ltd & Axis Capital Ltd
Listing NSE and BSE
Source: Company Data
March 16, 2018 3
Sandhar Technologies
Company History
Founded by Mr. Jayant Davar, the Company was incorporated as ‘Sandhar Locking Devices Private Limited’ on October 19, 1987, at New Delhi, India. From being a manufacturer of only Sheet metal components & two‐wheeler locks with just one customer Hero (formerly Hero Honda), the company today manufactures 21 categories of products supplying to 79 OEM customers globally. In the past decade, the company has made four acquisitions (of which one was international – Spain) and has entered in six JVs for technological support.
Promoter’s Background
Jayant Davar, aged 56 years, is the Co‐Chairman and Managing Director of the
Company. He is the founding Director, and is the Promoter of the Company. He holds
a bachelors’ degree in mechanical engineering from the Punjabi University, Patiala,
and has successfully completed the president management programme from the
Harvard Business School. He was the chairman of the Confederation of Indian
Industries, Northern Region, and has been the president of the Auto Component
Manufacturers Association in the past. He has three decades of experience in the
auto components sector.
Dharmendar Nath Davar is the Chairman and Non‐Executive, Non‐Independent
Director of the Company. He was first appointed as a Director on July 2, 1994. He has
a bachelors’ degree in commerce, and a masters’ degree in arts (economics) from
Delhi University. This apart, he is a certified associate by the Indian Institute of
Banking and Finance. He is a former chairman of the Industrial Finance Corporation
of India. He has over five decades of experience in the fields of finance, banking,
corporate laws, and management.
Arvind Joshi is the Whole‐time Director of the Company. He was appointed as a
Director on May 31, 2013. He was first appointed as the CFO and Company Secretary
on December 4, 2006. He holds a bachelors’ degree in science from the University of
Calcutta, a bachelors’ degree in law from the University of Delhi, and is an Associate
Member of the Institute of Chartered Accountants of India, as well as the Institute of
Company Secretaries of India.
Monica Davar is a Non‐Independent, Non‐Executive Director of the Company. She
was first appointed as a Director in 1987. She completed her pre‐university studies in
the commerce stream. She has over 20 years of experience in the auto components
sector.
Mohan Lal Bhagat is an Independent Director of the Company. He was first appointed as an Independent Director in 1993. He holds a bachelors’ degree in commerce from the University of Calcutta. He has 17 years of experience in the areas of financial and management consultancy.
Other independent directors of the company are Ravinder Nagpal, Krishan Lal Chugh, Arvind Pande, Arvind Kapur, Arjun Sharma.
March 16, 2018 4
Sandhar Technologies
Automobile Industry Overview
The two wheelers segment dominates the Indian auto industry (~80% by volumes)
and primarily dictates its tone. A robust 5.3% CAGR (during FY12‐FY17 period) in
total two wheeler sales accelerated auto industry growth, along with a 4% growth in
the passenger vehicles segment. On the other hand, a 2% drop in commercial
vehicles sales and subdued growth in tractors by 1.7% added to the pressure over
this period.
Exhibit 2: Segmental share (by volume) of automobile industry
Source: Company Data
Going ahead, CRISIL Research projects the two‐wheeler industry to grow at a faster
pace of 14‐16% in 2017‐18, compared with 7% in 2016‐17. Over the longer horizon,
CRISIL Research estimates demand to grow at a robust CAGR of 8‐10% till 2019‐20,
to ~23 million units. It expects motorcycle sales to expand at 6‐8% CAGR on the back
of rural demand and premium launches. Scooter sales is likely to grow at 13‐15%
CAGR, led by positive structural factors such as convenience, perceived higher utility
in intra‐city transport, and growth in demand from urban and semi‐urban areas.
The domestic PV industry is expected to grow at 10‐12% in 2017‐18 over the high
base of 2016‐17. Improved GDP (7% in 2017‐18) and crop output (normal monsoon)
will support demand growth. Pay commission arrears, improving rural sentiments
and continued traction for popular models are expected to give a push in 2017‐18.
MSIL's additional capacity, which became operational in February 2017, will also
provide thrust to volume growth.
MHCV sales are likely to grow at a moderate 2‐4% CAGR during 2017‐18 to 2021‐22
(five‐year CAGR), outpacing the previous corresponding period's growth. Driving
factors would be improving industrial activity, steady agricultural output, and the
government’s focus on infrastructure. However, full recovery will be limited due to
efficiencies achieved from the GST and better road infrastructure along with the
March 16, 2018 5
Sandhar Technologies
commissioning of the dedicated freight corridor. LCV demand is expected to expand
at 9‐12% CAGR during 2017‐18 to 2021‐22 due to higher consumption expenditure
and continued replacement of large three‐wheelers.
Tractor sales revived in 2016‐17, rising 18% YoY, on the back of a normal monsoon.
The tractor industry is expected to fare better in 2017‐18 (expected to grow 11‐13%
YoY as per CRISIL), supported by near‐normal and the government's focus on rural
development. Over the longer term, i.e. between 2016‐17 and 2021‐22, tractor
exports are expected to grow at 8‐10% CAGR.
Automotive Component Industry
Exhibit 3: Automotive component domestic demand trajectory
Source: Company Data
Domestic demand is primarily from OEMs and the replacement market. Due to an economic downturn in 2013‐14, the auto component industry saw the sharpest decline. In 2016‐17, domestic auto‐component production is estimated to have grown 6.9% on‐year, on the back of a 7‐9% on‐year rise of OEMs and a marginal 1% on‐year increase in exports. Demonetisation, though, impacted the rural‐dependent segments in the second half of the fiscal.
In 2017‐18, CRISIL Research projects domestic auto‐component production to grow 9‐11% on‐year, aided by 11‐13% YoY growth in the OEM segment and 7‐9% YoY increase in the replacement market. Over the long term, i.e. between 2016‐17 and 2021‐22, CRISIL Research expects domestic auto component production to grow at 10‐12% CAGR to ~Rs4,565bn, with OEM and exports growing at 10‐12% CAGR.
March 16, 2018 6
Sandhar Technologies
Exhibit 4: Automotive component exports trend
Source: Company Data
Exhibit 5: Key regulations across vehicle segments driving up realisations
Source: Company Data
March 16, 2018 7
Sandhar Technologies
Company Operations
Sandhar Technologies Ltd is a customer centric component supplier primarily
catering to automotive OEMs and largely focused on safety and security systems of
for automobiles, entailing locking systems, vision systems, door handles, sheet metal
components, cabins & fabrications and auto electronics. It is the leader in the two‐
wheeler locking systems market, and the commercial vehicle rear view market in
India, and is one of the two largest companies catering to the commercial vehicle
locking systems market, and the two‐wheeler rear view market in India. It is also one
of the two largest manufacturers of operator cabins in India, along with being the
largest player in the excavator cabins market. The company supplies to 79 OEMS
including Tier I suppliers across segments globally. Segment‐wise, two‐wheelers,
four‐wheelers (PC, CV & Tier I) and the Off the Highway segment form ~58%, 32%
and 9%, of the Company’s overall revenues respectively.
Exhibit 6: STL’s customer portfolio across segments
Source: Company Data
Presently, it manufactures 21 categories of products, including such product
categories that are manufactured through Subsidiaries and Joint Ventures, which
cater to different industry segments. Their portfolio comprises various categories of
products including safety and security systems such as lock assemblies, mirror
assemblies, operator cabins for off‐highway vehicles, aluminium spools, spindles,
and hubs. Other product categories include wheel assemblies, handle bar
assemblies, brake panel assemblies, sheet metal components such as fuel filler caps,
fuel cock assembly, step pillions, tools, dies, moulds, other aluminium components,
crane and tractor parts, plastic and painted parts such as door handles (inner and
outer), panels for televisions, and cabinets for air conditioners. The company has
also entered into the following joint venture arrangements:
March 16, 2018 8
Sandhar Technologies
Exhibit 7: STL’s has entered in six JVs for technological support
Source: Company Data
The Company has 31 manufacturing facilities across eight states in India, two
manufacturing facilities in Spain, and one manufacturing facility in Mexico. Further, it
is in the process of commissioning five manufacturing facilities in India over the next
fiscal.
In the last 12 years, the Company has received investment by two private equity
investors, namely Actis Group (entered in 2005, exited in 2012) and GTI.
Reasons for IPO
The Company will use the proceeds from the IPO (upto Rs2.25bn of total Rs3bn)
towards its long term debt repayment and the rest will be used for general corporate
purposes.
Key Risks
The Company depends on a limited number of customers for a significant portion of
their revenues. The loss of a major customer or significant reduction in production
and sales of, or demand for the products from their major customers may adversely
affect the business. Revenue from top five customers constituted ~67.2% of their
consolidated income from operations(net) for FY17 and 70.3% for H1FY18.
Exhibit 8: Top five customers of the company & their revenue contribution
Source: Company Data
March 16, 2018 9
Sandhar Technologies
The company relies significantly on the two‐wheeler market (particularly the
Motorcycle market while it has entered the scooter market too off late) and any
adverse changes to the demand in the two‐wheeler market could adversely impact
their business, results of operations and financial condition. Revenue from two‐
wheeler OEMs constituted 54.6% and 58.6% for FY17 and H1FY18, respectively.
The Company relies heavily on certain third parties. For instance, it depends on one
supplier for procurement of glass required for manufacturing rear view mirror who
supplies more than 90% of their total glass requirement. For H1FY18 and FY17, glass
accounted for 1.78% and 1.82% of the total raw material cost.
The Company had incurred a loss of ~Rs350mn over FY17 on account of 13 of its
manufacturing units making loss at the PBT level. This was mainly owing to
investment in new plants ahead of the demand from customers. While this loss has
significantly reduced and 9 of the 13 loss making units have turned positive, the
company is commissioning another 5 units in the coming fiscal which may again face
ramp up issues impacting margins.
Commodity price movement will have an impact on margins for the company given
the products included in the portfolio of the company. With exports forming ~11% of
overall revenues, the company is exposed to currency fluctuation risk too.
STL also depends heavily on its promoter Mr. Jayant Davar and any change in
services rendered by him may significantly impact the business.
March 16, 2018 10
Sandhar Technologies
Financials at a glance
Exhibit 9: Growth over FY16‐17 muted; H1FY18 growth over 20%
9.1
17.2
2.1
7.5
‐
5.0
10.0
15.0
20.0
‐
5,000
10,000
15,000
20,000
FY14 FY15 FY16 FY17 H1FY18
Revenue (Rs m) % growth (RHS)
Source: RHP, PL Research
Exhibit 10: PAT expected to see significant improvement in FY18
73.3
15.5
(12.1)
17.2
(20.0)
‐
20.0
40.0
60.0
80.0
‐
100
200
300
400
500
FY14 FY15 FY16 FY17 H1FY18
PAT (Rs m) % growth (RHS)
Source: RHP, PL Research
Exhibit 11: EBITDA growth for FY17 low at just ~3%
24.9
19.6
1.6 3.2
‐
5.0
10.0
15.0
20.0
25.0
30.0
‐
500
1,000
1,500
2,000
FY14 FY15 FY16 FY17 H1FY18
EBITDA (Rs m) % growth (RHS)
Source: RHP, PL Research
Exhibit 12: Margin trajectory remained flattish over FY14‐17
8.0 9.2 9.4 9.3 9.0
10.3
‐
2.0
4.0
6.0
8.0
10.0
12.0
FY13 FY14 FY15 FY16 FY17 H1FY18
EBITDA margins
Source: RHP, PL Research
Exhibit 13: Capex of ~Rs6.5bn over FY13‐H1FY18
1,185
904
1,113 1,075 1,101 970
‐
200
400
600
800
1,000
1,200
1,400
FY13 FY14 FY15 FY16 FY17 H1FY18
Capex (Rs m)
Source: RHP, PL Research
Exhibit 14: Most of the capex behind, FCF likely to improve
(252)
(155)(117)
362
(171)
138
(300)
(200)
(100)
‐
100
200
300
400
FY13 FY14 FY15 FY16 FY17 H1FY18
FCF (Rs m)
Source: RHP, PL Research
March 16, 2018 11
Sandhar Technologies
Financials
Exhibit 15: Consolidated P&L Statement (Rs m)
FY13 FY14 FY15 FY16 FY17
Revenue
Revenue from operations (gross) 12,599 13,698 16,062 16,437 17,650
Less: Excise duty 1,000 1,048 1,241 1,305 1,381
Revenue from operations (Net) 11,600 12,650 14,821 15,132 16,269
Other income 23 39 53 47 67
Expenses
Cost of raw material 7,350 7,688 9,115 9,026 9,602
Change in inventories (155) 43 (38) (13) (91)
Employee benefits expenses 1,562 1,602 1,843 2,018 2,354
Other expenses 1,913 2,153 2,510 2,688 2,945
Total Expenses 10,669 11,487 13,429 13,719 14,811
EBITDA 931 1,163 1,391 1,413 1,458
Depreciation & Amortization 359 394 524 552 603
Other income 39 42 57 52 72
Finance costs 356 394 410 424 427
Profit before Exceptional items and tax 254 418 514 490 500
Exceptional items ‐ ‐ ‐ 37 5
Profit before tax 254 418 514 452 495
Provision for Tax 62 85 130 115 99
Profit after tax 192 332 384 337 396
Less: Minority Share in Profits 1.3 1.3 1.2 3.0 3.7
Net Profit 191 331 383 335 392
EPS (Rs.) 3.8 6.6 7.5 6.5 7.7
Source: Company Data
Exhibit 16: Consolidated Cash Flows (Rs m)
Particulars FY13 FY14 FY15 FY16 FY17
Net Cash Flow from Operating activities 933 749 996 1,437 930
Net Cash Flow Used In Investing activities (1,243) (817) (1,129) (1,065) (1,050)
Net Cash Flow From Financing activities 297 (18) 203 (412) 148
Net Cash Generated (13) (86) 70 (40) 28
Capex (1,185) (904) (1,113) (1,075) (1,101)
FCF (252) (155) (117) 362 (171)
Source: Company Data
March 16, 2018 12
Sandhar Technologies
Exhibit 17: Consolidated Balance Sheet (Rs m)
FY13 FY14 FY15 FY16 FY17
Equity and liabilities
Shareholders' funds
Share capital 94 94 102 512 512
Reserves and surplus 1,699 1,977 2,490 2,225 2,502
Total of Shareholders' funds 1,793 2,071 2,592 2,736 3,013
Share application money pending allotment ‐ 15 ‐ ‐ ‐
Minority Interest 13 14 16 18 22
Non‐current liabilities
Long‐term borrowings 1,328 1,262 1,668 1,945 2,092
Deferred tax liabilities 140 145 106 80 83
Long term provisions 1 2 ‐ 6 8
Other Long Term Liabilities ‐ ‐ ‐ 57 51
Total of Non‐current liabilities 1,470 1,409 1,774 2,088 2,235
Current liabilities
Short‐term borrowings 895 1,483 1,423 1,247 1,833
Trade Payables ‐ ‐ ‐ ‐ ‐
Dues of micro and small enterprises 100 136 124 123 150
Dues of trade payable other than MSMEs 1,523 1,700 2,124 2,127 2,213
Other current liabilities 864 991 979 1,219 1,138
Short term provisions 46 81 129 95 138
Total of current liabilities 3,428 4,392 4,780 4,811 5,471
Total 6,704 7,902 9,161 9,654 10,741
Assets
Non‐current assets
Tangible assets
Property, Plant and Equipment 3,770 4,115 4,607 5,143 5,839
Intangible assets 46 69 155 135 120
Capital work in progress 205 263 405 552 292
Total 4,021 4,447 5,167 5,830 6,251
Goodwill on consolidation 12 7 0 7 5
Non‐current investment 30 30 30 31 31
Deferred tax assets 4 0 3 6 10
Long‐term loans and advances 178 293 162 163 157
Other non‐current assets 21 0 2 ‐ 7
Total of non‐current assets 4,266 4,778 5,364 6,037 6,462
Current Assets
Current investment 37 0 ‐ 10 10
Inventories 1,166 1,299 1,572 1,598 1,671
Trade receivables 980 1,514 1,876 1,667 2,093
Cash and bank balances 63 27 73 60 73
Short‐term loans and advances 184 282 252 275 303
Other current assets 7 2 24 7 129
Total of current assets 2,437 3,124 3,797 3,617 4,280
Total 6,704 7,902 9,161 9,654 10,741
Source: Company Data
March 16, 2018 13
Sandhar Technologies
Prabhudas Lilladher Pvt. Ltd.
3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai‐400 018, India
Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209
Rating Distribution of Research Coverage PL’s Recommendation Nomenclature
45.0% 43.4%
11.6%
0.0%0%
10%
20%
30%
40%
50%
BUY Accumulate Reduce Sell
% of Total Coverage
BUY : Over 15% Outperformance to Sensex over 12‐months
Accumulate : Outperformance to Sensex over 12‐months
Reduce : Underperformance to Sensex over 12‐months
Sell : Over 15% underperformance to Sensex over 12‐months
Trading Buy : Over 10% absolute upside in 1‐month
Trading Sell : Over 10% absolute decline in 1‐month
Not Rated (NR) : No specific call on the stock
Under Review (UR) : Rating likely to change shortly
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