Buy Setco Automotive-- M&HCV clutch leader; :: Anand Rathi

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Setco Automotive
M&HCV clutch leader; initiate with a Buy
We initiate coverage on Setco Automotive, the leader in
M&HCV clutches, with a Buy and a target of `182. Setco’s
unique business model, expansion and upswing in vehicle
volumes would lead to 29% earnings CAGR over FY11-13e.

 Domestic leader in M&HCV clutches. While Setco is one of
the top-five clutch manufacturers globally, it is the largest in India.
It caters to the OEM and replacement markets, meeting ~75% of
the M&HCV OEM clutch demand in the country.
 Unique business model. Setco is one of the largest clutch
suppliers to the after-sales segment via the distribution networks
of Tata Motors, Ashok Leyland and Eicher. Its after-market sales
saw a 29% CAGR over FY03-10, and growth even during the
economic downturn.
 Expansion to cater to the growing demand. Setco caters to the
strong sustainable demand from the clutch replacement and OEM
markets that we believe would continue. The company plans
setting up a unit in an SEZ to cater to rising exports; the unit
would be completed by FY12-13.
 Valuation and risks. At our target price, the stock would trade at
9x 12-month forward earnings and EV/EBITDA of 5.1x. The
target PE is in line with the three-year average. Key risks: low
volume offtake from OEMs and rising raw material prices.