Sandhar Technologies Ltd. - Choiceindia.com

0 downloads 124 Views 1MB Size Report
Mar 16, 2018 - vehicles and tractors. • The company is the leader in the 2W locking systems market and the. CV rear vi
“Subscribe with Caution” to

Sandhar Technologies Ltd. Fully priced issue

16th Mar. 2018 Salient features of the IPO: • Sandhar Technologies Ltd. (STL) is a customer centric auto component supplier largely focused on vehicular safety and security systems. • The issue is a combination of fresh and OFS. The company will not receive any proceeds from the OFS. Majority of the net proceeds from the fresh issue will be utilized to repayment or prepayment in full or part of certain loan availed by it. Key competitive strengths: • Long-standing, and growing relationships with major OEMs • Diversified product portfolio • Production facilities close to the customers • Vertical & horizontal integration of operations from product designing to supply solutions • In-house R&D, design capability and technical collaborations Risk and concerns: • Slow down in the economic activities • Change in the purchasing pattern and contract terms • Rise in input costs • Delay in expanding the product portfolio • Inability to meet customers expectations Valuation & recommendation: At the higher price band of Rs. 332 per share, STL’s share is valued at a P/E multiple of 50.3x (to its restated FY17 EPS of Rs. 6.6), which is in-line to its peer average of 48.1x. Below are few key observations of the issue: (For detailed valuation, refer to page 9 & 10 of the report)



Recommendation Subscribe with Caution Price Band (Rs.) Rs. 327 - 332 per Share Face Value (Rs.) Rs. 10 Shares for Fresh Issue 9.04 – 9.17mn Shares (mn) Shares for OFS (mn) 6.40mn Shares Fresh Issue Size (Rs. mn) Rs. 3,000mn OFS Issue Size (Rs. mn) Rs. 2,092.8 - 2,124.8mn Total Issue Size (Rs. mn) Rs. 5,092.8 - 5,124.8mn Bidding Date 19th Mar. - 21th Mar. 2018 MCAP at Higher Price Rs. 19,983mn Band Enterprise Value at Higher Rs. 20,825mn Price Band Book Running Lead ICICI Securities Ltd. and Axis Manager Capital Ltd. Registrar Link Intime India Pvt. Ltd. Sector/Industry Auto Parts & Equipment Promoters Mr. Jayant Davar Pre and post - issue shareholding pattern Pre – Issue Post - Issue Promoter and Promoter 82.53% 70.14% Group 17.47% 29.86% Public Total 100.00% 100.00% Retail Application Money at Higher Cut-Off Price per Lot Number of Shares per Lot 45 Application Money Rs. 14,940 per Lot Analyst Rajnath Yadav Research Analyst (022 - 6707 9999; Ext: 912) Email: [email protected]

STL is engaged in designing and manufacturing of a diverse range of automotive components, parts and systems, mainly utilized in 2Ws, passenger vehicles (PV) , commercial vehicles (CV), off-highway vehicles and tractors. • The company is the leader in the 2W locking systems market and the CV rear view market in India. It is also one of the two largest companies catering to the CV locking systems market and the 2W rear view market in India. Additionally, the company 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 manufactures its products from 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. This apart, it also has an overseas assembly and packaging center located in Poland. • STL has presence across various levels of the automotive component critical value chain, providing products and services that range from product design and prototyping to tool manufacturing, assembly, as well as production of integrated components. The company is able to achieve this through its horizontal and vertical integrated operations. Such integrated operation reduces the dependence on third party suppliers, thereby maintaining consistent quality, streamlined production process and shorter product delivery periods. • The company has a long-standing relationship with its major customers, which consists of 79 Indian and global OEMs namely, Hero TVS, Royal Enfield, Asoka Leyland, Caterpillar, Volvo, JCB, Honda Cars, Suzuki etc. • The company generates around 55% of the revenue from the 2W vehicles. It fully meets the 2W locking requirement of Hero and TVS. In the current fiscal it has venture into scooters segment. • The financial performance of the company is consistent over FY13-17. STL reported 8.8% CAGR rise in the total operating revenue over FY13-17 to Rs. 16,268.7mn in FY17. Consolidated EBITDA increased by 11.9% CAGR to Rs. 1,458.1mn in FY17. EBITDA margin expanded by around 1ppt over FY13-17 to 9% in FY17. Adjusted PAT increased by 20.1% CAGR to Rs. 397mn in FY17. PAT margin expanded by around 80bps over FY13-17 to 2.4% in FY17. Average RoIC and RoE of the period stood at 15.3% and 13.5%, respectively. • STL through this IPO would be rising around Rs. 3,000mn, of which around Rs. 2,250mn would be utilized to prepay/ repayment of loans availed by it. As of FY17 end, the company had total debt of Rs. 3,925.1mn with debt equity ratio of 1.3x. Post the repay/prepayment of debt, the debt equity ratio is expected at 0.7x. • For the six month ended Sept. 2017, STL reported a top-line of Rs. 9,894.1mn with an EBITDA and PAT margin of 10.3% and 3.5%, respectively. Extrapolating its H1 FY18 performance, we arrive at a top-line of Rs. 20,612.6mn (a growth of 26.7% over FY17) and EPS of 9.7 per share (an increase of 46.3% over FY17) for FY18E. EBITDA and PAT margin are anticipated at 9% and 2.8%, respectively. In FY19, it is expected to report a top-line of Rs. 23,704.5mn and EPS of 14.4 per share. • On valuation front, at higher price band, the company is demanding a P/E valuation of 50.3x (to its restated FY17 EPS of Rs. 6.6) as compared to peer average of 48.1x. With respect to its FY18E and FY19E earnings of Rs. 9.7 and 14.4 per share, respectively, it is demanding a P/E valuation of 34.4x and 23.1x, as compared to peer average of 29.1x and 22.6x. The issue seems to be fairly priced, however, considering its market positioning in auto components, stable financial performance, benefits from debt repayment and the growth in the sector, we assign a “Subscribe with Caution” rating for the issue.

1

About the issue: •

STL is coming up with an initial public offering (IPO) with 15.44 – 15.57mn shares (fresh issue: 9.04 – 9.17mn shares; OFS shares: 6.40mn shares) in offering. The offer represents around 25.6% of its post issue paid-up equity shares of the company. Total IPO size is Rs. 5,092.8 - 5,124.8mn.



The issue will open on 19th Mar. 2018 and close on 21st Mar. 2018.



The issue is book building with a price band of Rs. 327 - 332 per share.



The employee and retail discount is Rs. 10 on the offer price.



The issue is a combination of fresh and OFS. The company will not receive any proceeds from the OFS. Majority of the net proceeds from the fresh issue will be utilized to repayment or prepayment in full or part of certain loan availed by it.



Its promoter holds 82.53% stake in the company and post IPO this will come down to 17.47%. Public holding will increase from current 17.47% to 29.86%.

Pre and Post Issue Shareholding Pattern (%) Pre Issue

Post Issue (at higher price band)

Promoter & Promoter Group (%)

82.53%

70.14%

Public (%)

17.47%

29.86%

Source: Company RHP

Indicative IPO Process Time Line:

Unblocking of ASBA Account 27-Mar-2018

Offer Closes on 21-Mar-2018

Offer Opens on 19-Mar-2018

Finalization of Basis of Allotment 26-Mar-2018

Listing on Stock Exchanges 02-Apr-2018

Credit to Demat Accounts 28-Mar-2018

2

Company Introduction: STL is a customer centric component supplier primarily catering to automotive original equipment manufacturers (OEM) and largely focused on safety and security systems of vehicles with a pan India presence and a growing international footprint. It is the leader in the two-wheeler (2W) locking systems market and the commercial vehicle (CV) rear view market in India. the company is also one of the two largest companies catering to the CV locking systems market and the 2W rear view market in India. STL is also one of the two largest manufacturers of operator cabins in India along with being the largest player in the excavator cabins market (Source: Company RHP). The company is involved in designing and manufacturing a diverse range of automotive components, parts and systems, driven by technology, process, people and governance. Its long-standing relationship with its major customers has been one of the most significant factors contributing to its growth. STL’s customer portfolio consists of 79 Indian and global OEMs across various segments, including those indicated in the table below:

Source: Company RHP

In addition to the above OEM customers, the company also has relationships with global automotive component suppliers such as Autoliv, Bosch, and CTS, to whom it supplies various products. Presently, STL manufactures 21 categories of products, which cater to different industry segments. Its portfolio comprises various categories of products including safety and security systems such as lock assemblies, mirror assemblies, operator cabins for off-highway vehicles, aluminum spools, spindles, and hubs. The company also manufactures other product categories including 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 aluminum components, crane and tractor parts, plastic and painted parts such as door handles (inner and outer), panels for televisions, and cabinets for air conditioners. STL has also entered into the following joint venture arrangements:

Source: Company RHP

3

Company Introduction (Contd…): STL manufactures its products from 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. This apart, the company also has an overseas assembly and packaging center located in Poland. STL’s facilities are located in key auto-clusters in the northern, southern, and western parts of India, and most of its facilities are in close proximity to the plants of its OEM customers. Most of its manufacturing facilities have their own engineering department which focuses on customer programs and continuous improvements to specific products. Further, the company has also entered into technical collaborations with: (i) Honda Lock for availing technical advice from Honda Lock in relation to door mirrors, outside door handles, and key sets for automobiles and motorcycles, and (ii) JEM Techno for availing technical advice from JEM Techno in relation to relays used in automobiles. The company has also collaborated with leading international players for development of parking assistant systems, fuel filters, fuel modules, starter motors and shark-finned antennas. Clientele: STL supplies components to OEMs in 2Ws, passenger vehicles (PV), CV, off-highway vehicle and tractor segments, as well as some non-automotive OEMs. Its OEM customers include some of the largest Indian and global OEMs such as Ashok Leyland, Caterpillar, Doosan Bobcat, Escorts, Hero, Honda Cars, Hyundai Construction, International Tractors, JCB, Kobelco, Komatsu, Mahindra & Mahindra, Royal Enfield, Scania, SML Isuzu, TAFE, Tata Motors, TVS, UM Lohia, and Volvo. The table below sets forth details of some of its major customers and products supplied by them:

Source: Company RHP

3

Company Introduction (Contd…): Competition: The automotive component industry is extremely competitive. STL faces competition from both domestic and international players. Typically, large automotive component players supply exclusively to only a few select OEMs. Since, the company caters to various segments in the automotive industry, it competes with various companies for each of its different product ranges. Some of the competitors within the key product categories in which it operate are:

Source: Company RHP

Financial performance: On the back of increase in the sale of products across all key categories in 2W, 4W and off-high vehicles segment, STL reported 8.8% CAGR rise in the total operating revenue over FY13-17 to Rs. 16,268.7mn in FY17. Business from locks, mirror assemblies and wheel assemblies increased by 6.2%, 14% and 1.3% CAGR, respectively, during the period. For the half year ended Sept. 2017, top-line stood at Rs. 9,894.1mn. Total operating expenses increased in-line with top-line and increased by 8.5% CAGR over FY13-17. Cost of raw material & components consumed, which formed around 60% of the top-line, increased by 6.9% CAGR. Employee expenses, which formed 12-14% of the top-line increased by 10.8% CAGR, while other expenses (which formed 16-18% of the top-line increased by 11.4% CAGR during the period. As a result, consolidated EBITDA increased by 11.9% CAGR to Rs. 1,458.1mn in FY17. EBITDA margin expanded by around 1ppt over FY13-17 to 9% in FY17. For H1 FY18, EBITDA stood at Rs. 1,023.8mn with margin of 10.3%. Depreciation & amortization charges increased by 13.8% CAGR, while finance cost increased by 4.6% during FY13-17. Other income increased by 29.8% CAGR. Consequently, adjusted PAT increased by 20.1% CAGR to Rs. 397mn in FY17. PAT margin expanded by around 80bps over FY13-17 to 2.4% in FY17. In H1 FY18, reported PAT stood at Rs. 342.3mn with a margin of 3.5%.

3

Company Introduction (Contd…): Given below is the snapshot of the financial performance: Locks Mirror Assembly Wheel Assembly Sheet Metal Components Dies and Moulds Other Products Aluminum Components Tools Crane and Tractor Parts Cabins Plastic Parts Handle Bar Assembly Sale of Products Sale of Services Other Operating Revenue Total Operating Revenue (Gross) Excise Duty Total Operating Revenue (Net)

FY13 3,091.4 1,276.3 1,849.4 1,792.8 53.5 507.4 1,797.7 193.4 116.2 476.0 537.6 680.2 12,372.0 120.5 106.8 12,599.3 (999.8) 11,599.5

FY14 3,341.1 1,612.3 1,831.4 1,879.0 58.0 667.4 1,952.4 371.9 105.2 294.2 719.1 603.4 13,435.2 140.5 122.4 13,698.1 (1,048.1) 12,650.0

FY15 3,622.8 2,172.1 1,983.0 2,095.4 98.5 1,134.2 1,841.2 526.6 94.2 497.7 949.9 665.9 15,681.6 246.3 133.8 16,061.7 (1,241.2) 14,820.5

FY16 3,846.1 2,263.5 1,885.8 2,201.7 100.4 1,178.9 2,151.5 358.1

FY17 3,933.9 2,158.4 1,945.1 2,252.0 107.8 1,097.3 2,855.2 153.5

H1 FY18 2,288.4 1,201.7 1,371.4 1,355.5 71.3 998.3 998.0 183.9

826.8 657.1 594.7 16,064.6 242.9 129.4 16,436.8 (1,304.6) 15,132.2

1,227.2 758.9 764.6 17,253.9 234.7 161.0 17,649.6 (1,380.9) 16,268.7

706.2 396.4 497.6 10,068.5 128.2 93.6 10,290.3 (396.3) 9,894.1

CAGR (%) 6.2% 14.0% 1.3% 5.9% 19.1% 21.3% 12.3% -5.6% -100.0% 26.7% 9.0% 3.0% 8.7% 18.1% 10.8% 8.8% 8.4% 8.8%

Y-o-Y (%) 2.3% -4.6% 3.1% 2.3% 7.4% -6.9% 32.7% -57.1% 48.4% 15.5% 28.6% 7.4% -3.4% 24.5% 7.4% 5.8% 7.5%

FY13 11,599.5 930.7 190.6 3.2

FY14 12,650.0 1,163.0 331.1 5.5

FY15 14,820.5 1,391.5 382.8 6.4

FY16 15,132.2 1,413.1 371.9 6.2

FY17 16,268.7 1,458.1 397.0 6.6

H1 FY18 9,894.1 1,023.8 342.3 5.7

Inventories Days Debtor Days Payable Days Cash Conversion Cycle

36.7 30.9 (51.1) 16.5

35.5 36.0 (49.9) 21.6

35.3 41.8 (50.3) 26.8

38.2 42.7 (54.3) 26.7

36.7 42.2 (51.7) 27.1

71.4 97.5 (116.3) 52.6

0.0% 8.1% 0.3% 13.3%

-4.1% -1.3% -4.6% 1.5%

Cash Flow from Operating Activities NOPLAT FCF RoIC (%)

932.7 431.2

748.7 612.3 379.9 19.3%

995.7 647.9 (226.6) 15.5%

1,437.2 643.0 331.1 13.9%

929.8 684.3 183.4 13.5%

1,107.8 474.2

-0.1% 12.2%

9.2%

(71) bps

-35.3% 6.4% -44.6% (35) bps

17.2% 19.6% 9.4% 15.6% 2.6%

2.1% 1.6% 9.3% -2.8% 2.5%

7.5% 3.2% 9.0% 6.7% 2.4%

10.3%

94 bps

(38) bps

3.5%

80 bps

(2) bps

Total Operating Revenue (Net) EBITDA Adjusted PAT Restated Adjusted EPS

14.2%

CAGR (%) Y-o-Y (%) 8.8% 7.5% 11.9% 3.2% 20.1% 6.7% 20.1% 6.7%

Revenue Growth Rate (%) EBITDA Growth Rate (%) EBITDA Margin (%) Reported PAT Growth Rate (%) Reported PAT Margin (%)

8.0% 1.6%

9.1% 25.0% 9.2% 73.7% 2.6%

Inventories Turnover Ratio (x) Trade Receivable Turnover Ratio (x) Accounts Payable Turnover Ratio (x) Fixed Asset Turnover Ratio (x) Total Asset Turnover Ratio (x)

10.0 11.8 7.1 2.9 1.7

10.3 10.1 7.3 2.8 1.6

10.3 8.7 7.3 2.9 1.6

9.5 8.5 6.7 2.6 1.6

10.0 8.7 7.1 2.6 1.5

5.1 3.7 3.1 1.4 0.8

0.0% -7.5% -0.3% -2.5% -3.3%

4.3% 1.3% 4.9% 0.3% -3.4%

Current Ratio (x) Debt to Equity (x) Net Debt to EBITDA (x)

0.7 1.2 2.3

0.7 1.3 2.3

0.8 1.2 2.2

0.8 1.2 2.2

0.8 1.3 2.6

0.7 1.2 3.8

2.4% 1.2% 3.7%

4.1% 11.6% 19.3%

10.6% 2.8% 17.4%

15.8% 4.2% 21.9%

14.7% 4.2% 19.8%

13.5% 3.9% 17.8%

13.1% 3.7% 16.2%

10.3% 2.8% 12.6%

RoE (%) RoA (%) RoCE (%)

253 bps (42) bps 85 bps (16) bps (122) bps (156) bps

Source: Company RHP

3

Competitive Strengths: • • • • •

Long-standing, and growing relationships with major OEMs Diversified product portfolio Production facilities close to the customers Vertical and horizontal integration of operations from product designing to supply solutions In-house R&D, design capability and technical collaborations

Business Strategy: • • • • •

Expansion of product portfolio through investment in new products and business with high growth potential Expansion in the customer base Increase the wallet share from existing OEM customers Inorganic growth through strategic acquisitions Ensure efficiency and cost optimization and enhance innovation and design capabilities

Risk and Concerns: • • • • • •

Slow down in the economic activities Lower than expected growth in 2W industry Change in the purchasing pattern and contract terms Rise in input costs Delay in expanding the product portfolio Inability to meet customers expectations

6 © CHOICE INSTITUTIONAL RESEARCH

Peer Comparison and Valuation: Face Value (Rs.) Sandhar Technologies Ltd. 10 Minda Corporation Ltd. 2 Jay Ushin Ltd. 10 Fiem Industries Ltd. 10 Alicon Castalloy Ltd. 5 Sundaram-Clayton Ltd. 5 Endurance Technologies Ltd. 10 Enkei Wheels (India) Ltd. 5 Wheels India Ltd. 10 Steel Strips Wheels Ltd. 10 JBM Auto Ltd. 5 Minda Industries Ltd. 2 Average Company Name

Company Name

Total Operating Revenue 1M 3M 6M 1Y (Rs. mn) 332 19,983 20,825 16,268.7 185 38,670 43,598 -8.9% -2.0% 38.0% 100.0% 29,620.4 547 2,112 3,111 -31.1% -12.4% 46.6% 89.1% 7,876.3 833 10,963 11,734 -9.2% -12.5% -12.4% -2.0% 10,188.3 583 7,787 9,891 -11.5% 3.1% 2.2% 45.7% 7,727.8 4,781 96,737 111,346 -3.8% -6.6% 3.4% 42.8% 134,982.0 1,260 177,228 179,871 6.7% 3.4% 24.3% 81.0% 55,738.7 386 5,951 6,574 -4.0% 5.6% -9.1% 139.3% 4,067.2 2,192 26,380 29,100 1.6% 20.5% 52.8% 76.6% 21,728.7 1,034 16,091 23,730 -1.1% 5.4% 16.9% 45.2% 13,316.7 430 17,552 22,011 -11.9% -15.4% -27.0% 63.5% 17,902.3 1,115 96,374 97,128 -4.4% 0.7% 28.6% 150.7% 35,050.3 CMP (Rs.)

MCAP EV (Rs. mn) (Rs. mn)

EPS BVPS DPS (Rs.) (Rs.) (Rs.)

Sandhar Technologies Ltd. 6.6 100.3 Minda Corporation Ltd. 4.6 32.8 Jay Ushin Ltd. 10.7 138.3 Fiem Industries Ltd. 25.2 321.9 Alicon Castalloy Ltd. 19.6 130.6 Sundaram-Clayton Ltd. 163.2 1,381.6 Endurance Technologies Ltd. 23.5 122.9 Enkei Wheels (India) Ltd. 2.7 20.4 Wheels India Ltd. 50.1 388.4 Steel Strips Wheels Ltd. 45.7 348.0 JBM Auto Ltd. 16.1 123.1 Minda Industries Ltd. 19.4 135.0 Average

1.3 0.2 2.0 8.0 4.3 31.5 0.4 0.0 5.0 1.5 2.0 1.1

Debt Equity Ratio 0.7 0.8 1.9 0.4 1.3 0.5 0.3 2.2 0.6 1.6 0.9 0.4 1.0

Stock Return (%)

Fixed Asset Turnover Ratio 2.6 3.5 5.0 2.0 2.9 4.6 3.3 3.2 4.0 1.2 2.4 3.4 3.2

EBITDA PAT (Rs. mn) (Rs. mn) 1,458.1 397.0 1,814.1 960.8 147.3 41.2 1,177.9 331.3 868.4 261.7 10,009.8 3,302.0 7,393.1 3,303.1 334.8 42.1 1,867.9 602.6 1,641.9 710.4 1,913.5 658.8 3,835.9 1,680.8

RoE (%)

RoCE (%)

P/E (x)

P/B (x)

EV / Sales (x)

6.6% 14.0% 7.7% 7.8% 15.0% 11.8% 19.1% 13.4% 12.9% 13.1% 13.1% 14.4% 12.9%

10.3% 7.6% -0.2% 12.8% 14.4% 14.2% 19.7% 6.4% 16.3% 8.1% 13.4% 14.2% 11.5%

50.3 40.2 51.3 33.1 29.8 29.3 53.7 141.3 43.8 22.7 26.6 57.3 48.1

3.3 5.6 4.0 2.6 4.5 3.5 10.2 18.9 5.6 3.0 3.5 8.3 6.3

1.3 1.5 0.4 1.2 1.3 0.8 3.2 1.6 1.3 1.8 1.2 2.8 1.6

EV / EBITDA (x) 14.3 24.0 21.1 10.0 11.4 11.1 24.3 19.6 15.6 14.5 11.5 25.3 17.1

EBITDA Margin (%) 9.0% 6.1% 1.9% 11.6% 11.2% 7.4% 13.3% 8.2% 8.6% 12.3% 10.7% 10.9%

PAT Margin (%) 2.4% 3.2% 0.5% 3.3% 3.4% 2.4% 5.9% 1.0% 2.8% 5.3% 3.7% 4.8%

9.3%

3.3%

MCAP / Sales (x)

Earning Yield (x)

1.2 1.3 0.3 1.1 1.0 0.7 3.2 1.5 1.2 1.2 1.0 2.7 1.4

2.0% 2.5% 2.0% 3.0% 3.4% 3.4% 1.9% 0.7% 2.3% 4.4% 3.8% 1.7% 2.6%

Note: FY17 financials; Source: Choice Broking Research

At the higher price band of Rs. 332 per share, STL’s share is valued at a P/E multiple of 50.3x (to its restated FY17 EPS of Rs. 6.6), which is in-line to its peer average of 48.1x. Below are few key observations of the issue: •





STL is engaged in designing and manufacturing of a diverse range of automotive components, parts and systems, driven by technology, process, people and governance. Presently, it manufactures 21 categories of products with varieties, which cater to different automotive segments such as 2Ws, PVs, CVs, off-highway vehicles and tractors, as well as nonautomotive segments including medical and electrical equipment. The company is the leader in the 2W locking systems market and the CV rear view market in India. It is also one of the two largest companies catering to the CV locking systems market and the 2W rear view market in India. Additionally, the company 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 manufactures its products from 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. This apart, it also has an overseas assembly and packaging center located in Poland.

7 © CHOICE INSTITUTIONAL RESEARCH

Peer Comparison and Valuation (Contd…): •

• •









STL has presence across various levels of the automotive component critical value chain, providing products and services that range from product design and prototyping to tool manufacturing, assembly, as well as production of integrated components. The company is able to achieve this through its horizontal and vertical integrated operations. Such integrated operation reduces the dependence on third party suppliers, thereby maintaining consistent quality, streamlined production process and shorter product delivery periods. The company has a long-standing relationship with its major customers, which consists of 79 Indian and global OEMs namely, Hero TVS, Royal Enfield, Asoka Leyland, Caterpillar, Volvo, JCB, Honda Cars, Suzuki etc. The company generates around 55% of the revenue from the 2W vehicles. It fully meets the 2W locking requirement of Hero and TVS. In the current fiscal it has venture into scooters segment. Go going by the Crisil Research’s estimate on the 2W industry growth, we are of the opinion that STL’s product will be demand. Also with the revival in the rural economy and the construction activities, the outlook of the company’s products catering to the CV and off-highway vehicles seems to be bright. The financial performance of the company is consistent over FY13-17. STL reported 8.8% CAGR rise in the total operating revenue over FY13-17 to Rs. 16,268.7mn in FY17. Consolidated EBITDA increased by 11.9% CAGR to Rs. 1,458.1mn in FY17. EBITDA margin expanded by around 1ppt over FY13-17 to 9% in FY17. Adjusted PAT increased by 20.1% CAGR to Rs. 397mn in FY17. PAT margin expanded by around 80bps over FY13-17 to 2.4% in FY17. Average RoIC and RoE of the period stood at 15.3% and 13.5%, respectively. STL through this IPO would be rising around Rs. 3,000mn, of which around Rs. 2,250mn would be utilized to prepay or repayment of loans availed by it. As of FY17 end, the company had total debt of Rs. 3,925.1mn with debt equity ratio of 1.3x. Post the repay/prepayment of debt, the debt equity ratio is expected at 0.7x. The benefit of debt repayment would be realized in FY19. For the six month ended Sept. 2017, STL reported a top-line of Rs. 9,894.1mn with an EBITDA and PAT margin of 10.3% and 3.5%, respectively. Extrapolating its H1 FY18 performance, we arrive at a top-line of Rs. 20,612.6mn (a growth of 26.7% over FY17) and EPS of 9.7 per share (an increase of 46.3% over FY17) for FY18E. EBITDA and PAT margin are anticipated at 9% and 2.8%, respectively. In FY19, it is expected to report a top-line of Rs. 23,704.5mn and EPS of 14.4 per share. On valuation front, at higher price band, the company is demanding a P/E valuation of 50.3x (to its restated FY17 EPS of Rs. 6.6) as compared to peer average of 48.1x. With respect to its FY18E and FY19E earnings of Rs. 9.7 and 14.4 per share, respectively, it is demanding a P/E valuation of 34.4x and 23.1x, respectively, as compared to peer average of 29.1x and 22.6x.

The issue seems to be fairly priced, however, considering its market positioning in auto components, stable financial performance, benefits from debt repayment and the growth in the sector, we assign a “Subscribe with Caution” rating for the issue.

7 © CHOICE INSTITUTIONAL RESEARCH

Financial Statements: Consolidated Profit and Loss Statement (Rs. mn) FY13 Total Operating Revenue (Net) Cost of Raw Material and Components Consumed Change in Inventories of Finished Goods and Work in Progress Employee Benefits Expenses Other Expenses EBITDA Depreciation and Amortization Expenses EBIT Finance Costs Finance Income Other Income Exceptional Items PBT Tax Expenses PAT Before Minority Interest Minority Interest Reported PAT Adjusted PAT

FY14

FY15

FY16

FY17

11,599.5 12,650.0 14,820.5 15,132.2 16,268.7

CAGR over Annual Growth FY13 - 17 (%) over FY16 (%) 9,894.1 8.8% 7.5%

H1 FY18

(7,349.6) (7,688.3) (9,114.6) (9,025.6) (9,602.2) (5,984.4) 155.0

(43.2)

37.9

12.7

90.7

65.4

(1,561.5) (1,602.2) (1,842.8) (2,018.4) (2,353.6) (1,300.5) (1,912.6) (2,153.2) (2,509.5) (2,687.8) (2,945.4) (1,650.7) 930.7 1,163.0 1,391.5 1,413.1 1,458.1 1,023.8 (359.2) (393.7) (523.7) (551.5) (602.8) (336.7) 571.5 769.4 867.8 861.6 855.4 687.1 (356.4) (394.1) (410.0) (423.5) (427.4) (200.8) 15.7 3.6 3.7 4.9 5.0 2.7 23.4 38.8 52.9 46.7 66.6 11.9 (37.4) (5.1) 254.3 417.7 514.3 452.2 494.5 501.0 (62.4) (85.3) (130.3) (114.7) (98.9) (155.2) 191.8 332.4 384.0 337.5 395.6 345.7 (1.3) (1.3) (1.2) (3.0) (3.7) (3.4) 190.6 331.1 382.8 334.5 391.9 342.3 190.6 331.1 382.8 371.9 397.0 342.3

6.9%

6.4%

-12.5%

613.9%

10.8% 11.4% 11.9% 13.8% 10.6% 4.6% -24.9% 29.8%

16.6% 9.6% 3.2% 9.3% -0.7% 0.9% 2.1% 42.7% -86.5% 9.3% -13.8% 17.2% 23.2% 17.2% 6.7%

18.1% 12.2% 19.8% 30.6% 19.8% 20.1%

Consolidated Balance Sheet Statement (Rs. mn) FY13

FY14

FY15

FY16

FY17

93.7 1,699.4

93.7 1,977.4

102.3 2,489.7

511.6 2,224.8

511.6 2,501.8

CAGR over Annual Growth FY13 - 17 (%) over FY16 (%) 511.6 52.8% 0.0% 2,795.7 10.2% 12.5%

18.5 1,945.1 79.7 5.8 57.2 1,246.8 2,250.1 1,219.0 95.0 9,653.5

22.2 2,092.5 83.2 8.2 50.8 1,832.6 2,362.3 1,138.0 138.3 10,741.4

25.6 1,918.2 81.7 9.5 104.2 2,104.1 3,152.7 1,414.3 236.1 12,353.6

14.3% 12.0% -12.3% 56.3%

5,143.2 134.5 552.2 6.7 31.1 6.1 163.1

5,838.7 119.6 292.5 5.3 31.2 10.0 157.0 7.5 10.0 1,670.6 2,093.3 73.0 303.5 129.2 10,741.4

6,124.6 109.3 696.7 4.6 30.4 13.4 230.7 3.0 25.0 1,935.3 2,643.4 60.9 453.6 22.9 12,353.6

11.6% 27.2% 9.3% -18.4% 0.8% 27.8% -3.2% -23.0% -28.0% 9.4% 20.9% 3.7% 13.3% 105.4% 12.5%

Equity Share Capital Reserves and Surplus Share Application Money Pending Allotment Minority Interest Long Term Borrowings Deferred Tax Liabilities Long Term Provisions Other Long Term Liabilities Short Term Borrowings Trade Payables Other Current Liabilities Short Term Provisions Total Liabilities

13.0 1,328.1 140.4 1.4

14.3 1,262.3 144.9 2.0

15.5 1,667.5 106.0

895.3 1,623.1 863.9 45.6 6,703.8

1,482.8 1,836.7 991.4 81.1 7,901.5

1,422.9 2,248.9 978.8 129.2 9,160.8

Tangible Assets Intangible Assets Capital Work in Progress Goodwill on Consolidation Non Current Investment Deferred Tax Assets Long Term Loans And Advances Other Non Current Assets Current Investment Inventories Trade Receivables Cash and Bank Balances Short Term Loans and Advances Other Current Assets Total Assets

3,770.3 45.8 204.7 11.9 30.2 3.7 178.5 21.3 37.1 1,165.6 980.4 63.2 183.9 7.3 6,703.8

4,115.0 69.4 262.9 6.8 30.2 0.4 292.6 0.2 0.0 1,298.6 1,514.2 27.0 282.4 1.9 7,901.5

4,607.0 154.8 404.7 0.2 30.2 3.2 161.9 1.9

H1 FY18

14.8

1,572.0 1,876.4 72.7 252.0 23.9 9,160.8

10.0 1,598.2 1,666.8 60.4 274.6 6.5 9,653.5

19.6% 9.8% 7.1% 32.0% 12.5%

19.9% 7.6% 4.3% 41.3% -11.2% 47.0% 5.0% -6.6% 45.6% 11.3% 13.5% -11.1% -47.0% -21.7% 0.3% 63.1% -3.7% 0.0% 4.5% 25.6% 20.9% 10.5% 1875.7% 11.3%

Source: Company RHP

7 © CHOICE INSTITUTIONAL RESEARCH

Financial Statements (Contd…):

Consolidated Cash Flow Statement (Rs. mn) Particulars (Rs. mn) Cash Flow from Operations Cash Flow from Investing Activities Cash Flow from Financing Activities Net Cash Flow Opening Balance of Cash and Bank Balances Closing Balance of Cash and Bank Balances

FY13

FY14

FY15

FY16

FY17

932.7 748.7 995.7 1,437.2 929.8 (1,242.9) (816.6) (1,128.9) (1,064.9) (1,049.7) 296.8 (18.2) 202.9 (412.3) 147.6 (13.4) 41.2 36.9

(86.1) 36.9 20.4

69.7 20.4 40.0

(39.9) 40.0 37.0

27.6 37.0 60.4

1,107.8 (984.5) (155.3)

CAGR over FY13 - 17 (%) -0.1% -4.1% -16.0%

Annual Growth over FY16 (%) -35.3% -1.4% -135.8%

(32.0) 60.4 43.2

-2.6% 13.2%

-169.2% -7.3% 63.1%

H1 FY18

Source: Company RHP

Particulars (Rs. mn) Revenue Growth Rate (%) EBITDA Growth Rate (%) EBITDA Margin (%) EBIT Growth Rate (%) EBIT Margin (%) Reported PAT Growth Rate (%) Reported PAT Margin (%) Current Ratio Debt Equity Ratio Net Debt to EBITDA Inventories Days Trade Receivable Days Accounts Payable Days Cash Conversion Cycle Days Fixed Asset Turnover Ratio (x) Total Asset Turnover Ratio (x) RoE (%) RoA (%) RoCE (%) Restated Adjusted EPS (Rs.) Restated DPS (Rs.) BVPS (Rs.) Restated Operating Cash Flow Per Share (Rs.) Restated Free Cash Flow Per Share (Rs.)

Consolidated Financial Ratios FY13 FY14 9.1% 25.0% 8.0% 9.2% 34.6% 4.9% 6.1% 73.7% 1.6% 2.6% Liquidity Ratios 0.7 0.7 1.2 1.3 2.3 2.3 Turnover Ratios 36.7 35.5 30.9 36.0 (51.1) (49.9) 16.5 21.6 2.9 2.8 1.7 1.6 Return Ratios 10.6% 15.8% 2.8% 4.2% 17.4% 21.9% Per Share Data 3.2 5.5 0.6 1.6 30.0 34.9 15.5 12.4 6.3

FY15 17.2% 19.6% 9.4% 12.8% 5.9% 15.6% 2.6%

FY16 2.1% 1.6% 9.3% -0.7% 5.7% -2.8% 2.5%

FY17 7.5% 3.2% 9.0% -0.7% 5.3% 6.7% 2.4%

H1 FY18

0.8 1.2 2.2

0.8 1.2 2.2

0.8 1.3 2.6

0.7 1.2 3.8

35.3 41.8 (50.3) 26.8 2.9 1.6

38.2 42.7 (54.3) 26.7 2.6 1.6

36.7 42.2 (51.7) 27.1 2.6 1.5

71.4 97.5 (116.3) 52.6 1.4 0.8

14.7% 4.2% 19.8%

13.5% 3.9% 17.8%

13.1% 3.7% 16.2%

10.3% 2.8% 12.6%

6.4 1.6 43.3 16.5 (3.8)

6.2 3.0 45.8 23.9 5.5

6.6 1.3 50.4 15.4 3.0

5.7 0.9 55.4 18.4

10.3% 6.9% 3.5%

Note: Pre-issue data; Source: Company RHP

7 © CHOICE INSTITUTIONAL RESEARCH

Disclaimer This is solely for information of clients of Choice Broking and does not construe to be an investment advice. It is also not intended as an offer or solicitation for the purchase and sale of any financial instruments. Any action taken by you on the basis of the information contained herein is your responsibility alone and Choice Broking its subsidiaries or its employees or associates will not be liable in any manner for the consequences of such action taken by you. We have exercised due diligence in checking the correctness and authenticity of the information contained in this recommendation, but Choice Broking or any of its subsidiaries or associates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this recommendation or any action taken on basis of this information. This report is based on the fundamental analysis with a view to forecast future price. The Research analysts for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. Choice Broking has based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Choice Broking makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. The opinions contained within the report are based upon publicly available information at the time of publication and are subject to change without notice. The information and any disclosures provided herein are in summary form and have been prepared for informational purposes. The recommendations and suggested price levels are intended purely for stock market investment purposes. The recommendations are valid for the day of the report and will remain valid till the target period. The information and any disclosures provided herein may be considered confidential. Any use, distribution, modification, copying, forwarding or disclosure by any person is strictly prohibited. The information and any disclosures provided herein do not constitute a solicitation or offer to purchase or sell any security or other financial product or instrument. The current performance may be unaudited. Past performance does not guarantee future returns. There can be no assurance that investments will achieve any targeted rates of return, and there is no guarantee against the loss of your entire investment. POTENTIAL CONFLICT OF INTEREST DISCLOSURE (as on date of report) Disclosure of interest statement – • Analyst interest of the stock /Instrument(s): - No. • Firm interest of the stock / Instrument (s): - No.

+91-022-6707 9999

www.choicebroking.in

+91-022-6707 9959

Choice Equity Broking Pvt. Ltd. Choice House, Shree Shakambhari Corporate Park, Plot No: -156-158, J.B. Nagar, Andheri (East), Mumbai - 400 099. 13