Buy CEBBCO (Commercial Engineers & Body Builders Company Ltd) report by ENAM

Poised to Grow
Company Background
CEBBCO is one of the leading designers and manufacturers of vehicle bodies
for the commercial vehicles industry in India. It also provides wagon
refurbishment and manufactures component for railway wagons and coaches.
Recently, CEBBCO has also forayed into wagon manufacturing.

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Investment Argument
􀁺 Key beneficiary of structural shift towards FBV’s (Fully built vehicles):
Currently, FBV’s account for only 18% of the truck market while the
remainder is sold as chassis to customers, who then get the body built from
the unorganized players. We believe this industry is gradually shifting
towards FBV and expect its penetration rate to increase to 30% by FY14.
This is beneficial for both the OEM’s and the customers as it implies better
profitability for OEM’s and reduction in lead time and cost (as a result of
lesser excise duty) for the customers. Moreover, with only handful of
organized players and CEBBCO’s dominant market share of ~40%, we
believe CEBBCO would be the key beneficiary of this structural change.
Furthermore, CEBBCO would also benefit from the overall growth of the
CV market. To cater to this burgeoning demand, CEBBCO has increased its
capacity by 46% to 32,000 FBV’s. We have estimated revenue CAGR of 19%
over FY12-14E for this segment.
􀁺 Location advantage CEBBCO’s plants (6 nos) are strategically located close
to its key clients viz. Tata Motors, Eicher, Man Force and Ministry of
Defence which provides it with an advantage over its competitors in terms
of reduced logistics costs and lead time. Moreover, its plants are located in
smaller cities benefiting it with lower land, labour and overhead costs
resulting in competitive cost advantage.
􀁺 Diversifying into wagon manufacturing - ‘Capex behind, revenue to
accrue in FY13’: By leveraging its core strengths in designing and
fabrication, CEBBCO has forayed into wagon manufacturing with plant
capacity of 1,200 wagons per annum (fungible capacity funded through IPO
proceeds). Equipped with RDSO approval, CEBBCO is now eligible to bid
for new wagon orders from Indian Railways. We anticipate that railway
business will contribute Rs. 165 cr to topline (20% of sales) in FY14 with
EBITDA margin of 16%.
Valuation
We believe that by leveraging its relationship with OEM’s, CEBBCO is well
placed for growth in the FBV segment. Moreover, its wagon business will start
contributing meaningfully, going forward. Also, CEBBCO stands to benefit
from the TRIFAC policy of MP wherein it expects to receive Rs. 230 cr as sales
tax subsidy over the next seven years. We have estimated revenue and PAT to
grow at a CAGR of ~34% and ~47%, respectively, through FY12-14E. We
initiate BUY on the company with SOTP based target price of Rs. 105 (7x
FY14E Core EPS of Rs 11 + NPV of Rs 28 from sales tax subsidy).


RISKS TO VALUATION
􀁺 High dependence on single largest customer-‘Tata Motors’: CEBBCO derives close to
51% revenue from its single largest customer ‘Tata Motors’. Any adverse change or loss
of business from Tata Motors could impact CEBBCO’s earnings negatively.
􀁺 Delay in orders from railways: Delay in fresh orders for wagon manufacturing from
railway could hamper CEBBCO’s profitability adversely. Moreover, CEBBCO faces stiff
competition from established players like Titagarh and Texmaco in this space.
􀁺 We have assumed only maintenance capex for FY13-14E. However, surplus cash could be
deployed for expanding capacities.


VALUATION
􀁺 Revenue and PAT growth of ~34% and 47% CAGR during FY12-FY14E
Entry into Wagon
Manufacturing
Capacity
Expansion in FBV
Growth triggers in-place
􀁺 We anticipate EBITDA margin to be in the range of 14.5-15%, going forward
􀁺 Expansion of RoE and RoCE to 24% and 29%, resp. in FY14E
􀁺 Scalable business model
􀁺 Our target price of Rs. 105 (upside 21%) is based on a target P/E multiple of 7x FY14E core
EPS of Rs 11 + NPV of Rs 28/share