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CD Equisearch Pvt Ltd Feb 5, 2015

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Sundram Fasteners Ltd (SFL)

No. of shares (crore) 21.0

Mkt cap (Rs crs) 4120

Current price (04/02/15) 196.1

Price target (Rs)

160

52 week H/L (Rs.)

218/43

Book Value (Rs.) 43

P/BV (FY15e/16e)

4.5/3.9

P/E (FY15e/16e) 25.8/20.9

BSE Code 500403

NSE Code SUNDRMFAST

Bloomberg SF IN

Reuters SNFS.BO

Daily volume (avg. weekly) 261005

Shareholding pattern % Promoters 49.5

MFs / Banks / FIs 18.8

Foreign 2.8

Govt. Holding 0.0

Non-Promoter Corp. 2.2

Total Public 26.7

Total 100.0

As on Dec 31, 2014

Recommendation

REDUCE

Analyst

KISHAN GUPTA, CFA, FRM

Phone: + 91 (33) 3027 3043

E- mail: [email protected]

Figures in Rs crs FY12 FY13 FY14 FY15e FY16e

Income from operations* 2770.16 2650.99 2736.20 3160.67 3547.06

Other income 30.85 55.85 48.79 20.99 31.98

EBITDA (other income included) 335.25 321.52 338.28 414.12 468.33

Adjusted net profit after MI 99.44 82.93 120.60 159.82 196.94

EPS 4.73 3.95 5.74 7.61 9.37

EPS growth (%) -11.8 -16.6 45.4 32.5 23.2

Company Brief Sundram Fasteners (SFL), a leading auto - component manufacturer,

produces high-tensile fasteners, powder metal components, cold extruded

parts, hot forged components, radiator caps, automotive pumps, gear

shifters, gears and couplings, hubs and shafts, tappets and iron powder

for global players from its businesses in India, China, UK, Germany and

Malaysia.

Quarterly Highlights

� SFL's third quarter net profit rose by 5.2%, the weakest recording in

six quarters, due to decline in operating margins and sharp jump in

finance costs. Operating margins came off over 400 bps from the

previous quarter thanks to massive jump in 'other expenses' (up

42.7%). Finance costs more than doubled to Rs 20.13 crs last quarter

not least due to surge in exchange loss on foreign currency loans.

� Sales though rose at the fastest pace in five quarters helped by rapid

growth in domestic sales. Exports has also held firm for most of this

year thanks to buoyant US auto market. As a result, share of exports to

total turnover jumped 150 bps to 38.3% in first nine months of current

fiscal.

� After having grown at breakneck speed in the first half of current

fiscal, earnings have lost momentum largely due to lower operating

margins (12.4% in Q3FY15 compared to 16.2% in H1FY15). Other

income slid to Rs 9.39 crs in 9MFY15 from Rs 42.54 crs as foreign

exchange gains nosedived to Rs 4.66 crs from Rs 31.62 crs in the same

period a year ago. Yet mild recovery in domestic commercial vehicle

market and sustained growth in overseas shipments (up 23.5%) has

helped post 260 bps expansion in operating margins to 14.9% in first

nine months, a breathtaking departure from average margins of 12.7%

in the last five years ending fiscal 2014.

� The stock currently trades at 25.8x FY15e EPS of Rs 7.61 and

20.9xFY16e EPS of Rs 9.37. We assign a “reduce” rating on the stock

with price target of Rs 160 based on 17x FY16e earnings (on valuation

grounds, please refer to page 3 and 4), over a period of 6-9 months.

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CD Equisearch Pvt Ltd


Outlook & Recommendation

Indian auto industry – yet to fully recover

India's passenger vehicle segment continues to drag its feet for its domestic sales has grown by just 3.7% in the Apr-Dec

period. With the Union government rolling back excise concessions in Dec last year, The Society of Indian Automobile

Manufacturers (SIAM) scaled back its full year target by three percentage points to 1%. Still SFL has shown smart recovery

in its domestic sales so far this fiscal largely helped by modest rebound in sales of M&HCVs (up 10.33%) while the LCV

sales declined 12.8%. SFL’s domestic sale is therefore expected to kowtow the trend in domestic industrial activity and post

growth in mid teens next fiscal.

Exports on the boil

SFL's exports climbed 23.5% in the first six months of current fiscal buoyed by strong recovery in US auto market where

sales hit an eight year high last year. Fall in gasoline prices, which declined 34% to less than $2 last year, explains much of

the 5.8% increase in sales. According to Kelley Blue Book, a vehicle valuing source, average transaction price for a new

vehicle sold in the U.S. market in December was a record $34,367, up 2.5 percent from a year ago. Record sales prompted

LMC Automotive to forecast sale of 17m units in 2015 (16.4m in 2014).

Yet analysts and some industry executives reckon that the industry would slowdown this year after gut-wrenching

expansion from the depth of the financial crisis. Morgan Stanley reckons ongoing capacity expansion of American

carmakers would significantly outpace demand by 2016. Further it notes that 10m cars are sold in oil - exporting countries -

whose sales would decline as their economies suffer. Ford has been hit hard in Russia by west imposed sanctions while Fiat

Chrysler could be pushed back by recession in Brazil compounded by global slump in commodity prices.

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[ [

German operations – still battling

SFL's German operations is yet to see the light of the day as it

reported yet another year of loss (~ 2.1 m euros)last fiscal. After

showing resilience in the first half of current fiscal, the German

operations plunged again thanks to collapse in demand; we

estimate it to show deficit of 2.3 m euros this year. Yet the EU

passenger car registrations expanded for the sixteenth consecutive

month in December, thus taking the year end growth to 5.7%, first

annual increase in six years (see chart). Spain recorded the highest

annual increase (18.1%) followed by UK (9.3%), Italy (4.2%) and

Germany (2.9%).

Even the new commercial vehicles registrations rose 7.6% in 2014 helped by Germany (4.8%), UK (10.8%), Italy (13.9%)

and Spain (31.6%). The growth was led by robust dispatches of light commercial vehicles, while the demand for heavy

trucks shrank by 6.1% (German and Spanish markets expanded by 6.1% and 25.6% respectively last year (see chart).

Capex

With exports growing at full throttle, SFL has lined up robust expansion plans to support its exports. It commenced a

new factory (SEZ 2) at Mahindra World City for manufacture of new variants of shafts in last financial year. Plans are

afoot to invest Rs 150 crs in expanding capacities of existing products - engine components, metal powder products etc,

besides adding capacities of new products in current fiscal. Yet capacity utilization may get impacted due to prejudice to

maintain 'bad sizes' of few products like radiators and gear shifters to push margins higher.

Valuation

Though SFL would report awe-inspiring earnings growth of 27.8% in two years ending fiscal 2016, its earning is prone

vulnerability for two chief reasons. First, the growth in domestic automobile market is still fragile to say the least: trends

in passenger vehicle segment are still wobbly with extreme fluctuations in growth of monthly sales. Though M&HCV

sales have displayed sturdy growth in last few months but it has come on a small base. Second, export growth would

moderate next fiscal not least because of peaking US automobile market, which accounts for nearly 85% of its total

exports.

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Risks & Concerns

Forex volatility

SFL is heavily exposed to high volatility in forex volatility not least because of its foreign currency debt and exports. Though

it does hedge all short foreign currency debt obligations, the long term obligations are left unhedged, exposing the financials

to forex fluctuations.

Slowdown in auto sector

SFL's sales have taken a hit for couple of years ending fiscal 2014 due to slowdown in Indian and American auto sectors. It

has not only impacted its exports but also the performance of its European subsidiaries - Cramlington Precision Forge and

Peiner Umformtechnik; its European subsidiaries have reported sharp dip in profitability last fiscal year with the German

operations posted a loss of 2.1m euros.

Cross Sectional Analysis

Company Equity* CMP

Market

cap* Sales* PAT* OPMa NPM

a

Interest

Cov. ROEa P/BV P/E EV/EBITDA

Amtek Ind. 55.6 67 1858 3797 267 27.4 7.0 2.1 9.8 0.7 6.9 6.8

L.G.Bala. 15.7 587 921 1042 57 12.2 5.5 6.1 18.2 2.7 16.1 7.3

Subros 12 74 444 1214 23 11.6 1.9 1.6 7.7 1.4 19.2 5.6

Sundram 21 196 4119 2307 154 14.3 6.7 3.9 19.0 4.6 26.8 13.9

WABCO 9.5 5055 9584 1280 122 15.3 9.5 717.8 15.9 11.3 78.7 45.0

* Figures in Rs crs; a: in %

The stock currently trades at 25.8x FY15 e EPS of Rs 7.61 and 20.9x FY16e EPS of Rs 9.37. The stock has been rerated in last

few months thanks to buoyant exports and mild domestic recovery. Operating margins swelled too: up 260 bps in 9MFY15.

But emerging deflationary trends in Europe could stymie sales of overseas subsidiaries in Germany and UK; a weaker euro

would also prompt translation losses. Factoring all odds, we have revised next fiscal earning estimate by nearly 10%, but

advice caution. Therefore, the stock merits a ‘reduce’ recommendation with revised target of Rs 160 (previous target: Rs

137) based on 17x FY16e EPS of Rs 9.37 (ten year average P/E: 15); for more info, refer to our report dated July 17, 2014

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Financials

Standalone Quarterly Results Figures in Rs crs

Q3FY15 Q3FY14 % chg. 9MFY15 9MFY14 % chg.

Revenue from Operations 588.62 476.45 23.5 1785.99 1501.66 18.9

Other Income 5.18 4.06 27.6 9.39 42.54 -77.9

Total Income 593.80 480.51 23.6 1795.38 1544.20 16.3

Total Expenditure 515.92 412.83 25.0 1519.16 1317.58 15.3

PBIDT 77.88 67.68 15.1 276.22 226.62 21.9

Interest 20.13 9.76 106.3 56.30 48.73 15.5

Depreciation 21.76 19.42 12.0 64.45 57.60 11.9

PBT 35.99 38.50 -6.5 155.47 120.29 29.2

Tax 5.86 9.86 -40.6 36.13 26.85 34.6

Reported PAT 30.13 28.64 5.2 119.34 93.44 27.7

Extraordinary Item - - - - - -

Adjusted Net Profit 30.13 28.64 5.2 119.34 93.44 27.7 EPS (F.V. 1) 1.43 1.36 5.2 5.68 4.45 27.7

Consolidated Income Statement Figures in Rs crs

FY12 FY13 FY14 FY15e FY16e

Revenue from Operations 2770.16 2650.99 2736.20 3160.67 3547.06

Growth (%) 21.3 -4.3 3.2 15.5 12.2

Other Income 30.85 55.85 48.79 20.99 31.98

Total Income 2801.01 2706.84 2784.99 3181.66 3579.05

Total Expenditure 2465.76 2385.32 2446.70 2767.54 3110.72

EBITDA 335.25 321.52 338.28 414.12 468.33

Interest 98.16 89.78 67.59 75.04 68.14

PBDT 237.09 231.74 270.69 339.08 400.18

Depreciation 83.67 94.19 102.14 115.69 125.22

Tax 52.85 44.17 47.78 62.55 76.99

Reported PAT 100.57 93.38 120.77 160.84 197.98

Minority interest 1.00 0.44 0.00 1.02 1.04

PAT after MI 99.57 92.94 120.77 159.82 196.94

Extraordinary Item 0.13 10.00 0.17 0.00 0.00

Adjusted Net Profit 99.44 82.93 120.60 159.82 196.94

EPS (Rs.) 4.73 3.95 5.74 7.61 9.37

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Consolidated Balance Sheet Figures in Rs crs

FY12 FY13 FY14e FY15e FY16e

SOURCES OF FUNDS

Share Capital 21.01 21.01 21.01 21.01 21.01

Reserves 621.41 684.99 780.38 892.68 1038.93

Total Shareholders Funds 642.42 706.00 801.39 913.69 1059.94

Minority interest 3.97 4.15 3.89 4.91 5.95

Total Debt 892.58 857.68 732.88 740.00 640.00

Total Liabilities 1538.97 1567.83 1538.16 1658.60 1705.88

APPLICATION OF FUNDS

Gross Block 1644.96 1800.99 2048.71 2197.05 2275.40

Less: Accumulated Depreciation 795.72 893.38 1041.58 1120.15 1218.52

Net Block 849.24 907.61 1007.13 1076.90 1056.88

Capital Work in Progress 52.11 33.51 40.41 20.00 30.00

Investments 10.09 9.02 10.13 10.13 10.13

Current Assets, Loans & Advances

Inventory 446.80 440.30 440.95 463.00 500.04

Sundry Debtors 488.68 494.12 483.92 556.51 612.16

Cash and Bank 16.04 21.69 25.49 26.43 25.24

Loans and Advances 135.95 120.24 107.19 119.21 127.72

Total CA & LA 1087.47 1076.35 1057.55 1165.15 1265.15

Current liabilities 318.84 328.03 436.72 464.99 504.51

Provisions 78.01 73.60 87.99 97.16 104.88

Total Current Liabilities 396.85 401.63 524.71 562.14 609.40

Net Current Assets 690.62 674.72 532.84 603.01 655.75

Net Deferred Tax -93.98 -96.20 -96.65 -96.65 -96.65

Other Assets (Net Of Liabilities) 30.89 39.17 44.30 45.20 49.77

Total Assets 1538.97 1567.83 1538.16 1658.60 1705.88

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Key Financial Ratios

FY12 FY13 FY14 FY15e FY16e

Growth Ratios

Revenue (%) 21.3 -4.3 3.2 15.5 12.2

PBIDT (%) 24.3 -8.4 10.2 22.5 13.1

Net Profit (%) -11.8 -16.6 45.4 32.5 23.2

EPS (%) -11.8 -16.6 45.4 32.5 23.2

Margins

Operating Profit Margin (%) 11.0 10.0 10.6 12.4 12.3

Gross Profit Margin (%) 8.6 8.2 9.9 10.7 11.3

Net Profit Margin (%) 3.6 3.1 4.4 5.1 5.6

Return

ROCE (%) 11.5 9.3 10.9 13.4 14.7

RONW (%) 16.6 12.3 16.0 18.6 20.0

Valuations

Market Cap / Sales 0.4 0.3 0.5 1.3 1.2

EV/EBIDTA 6.1 5.5 6.0 11.7 10.3

P/E 11.7 10.3 10.9 25.8 20.9

P / BV 1.8 1.2 1.6 4.5 3.9

Other Ratios

Debt-Equity 1.4 1.2 0.9 0.8 0.6

Current Ratio 2.7 2.7 2.0 2.1 2.0

Interest Coverage 2.6 2.4 3.5 4.0 5.0

Turnover Ratios

Fixed Asset 3.5 3.0 2.9 3.0 3.3

Total Asset 1.9 1.7 1.8 2.0 2.1

Debtors 6.2 5.4 5.6 6.1 6.1

Inventory 5.9 5.4 5.6 6.1 6.5

Creditors 11.3 9.8 8.3 7.8 8.0

Working Capital 4.3 3.9 4.5 5.6 5.7

WC Ratios

Debtor Days 58.6 67.7 65.2 60.1 60.1

Inventory Days 62.0 67.9 65.7 59.6 56.5

Creditor Days 32.2 37.2 44.0 47.0 45.6

Cash Conversion Cycle 88.4 98.3 86.9 72.7 71.1

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Disclaimer

This document is meant for our clients only and is not for public distribution. This material is for the personal information of the

authorized recipient, and we are not soliciting any action based upon it. This report is not to be construed as an offer to sell or the

solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. The material is based

upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon as

such. Neither CD Equisearch Pvt. Ltd., nor any person connected with it, accepts any liability arising from the use of this document. The

recipient of this material should rely on their own investigations and take their own professional advice. Opinions expressed are our

current opinions as of the date appearing on this material only. While we endeavor to update on a reasonable basis the information

discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. Prospective investors and

others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice. If you have

any questions about this report please get in touch with CD Equisearch Pvt. Ltd.

CD Equisearch Pvt. Ltd. 10, Vaswani Mansion, 2nd Floor, Dinshaw Wachha Road, Churchgate Mumbai – 400 020. Phone: +91(22)

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