Initiating Coverage CEBBCO Buy Target Price: Rs146:: Centrum

Initiating Coverage

CEBBCO

Buy

Target Price: Rs146

CMP: Rs107

Upside: 36%

Key beneficiary of structural shift towards FBV

CEBBCO (Commercial Engineers & Body Builders Co Ltd) is one of the largest organized players in the conversion of chassis to FBVs (Fully Built Vehicles) with a market share of ~30-35%. We believe that CEBBCO is attractively placed to capitalize on the FBV opportunity (which is expected to grow at a CAGR of 43% over FY12-FY17E to Rs.73bn), due to its market leadership, wide product offerings and strong relationship with key OEMs. We initiate coverage with a Buy rating and a target price of Rs.145 (based on 8.5x September 2014E EPS).

m  Structural shift towards FBV. CEBBCO a key beneficiary:  Currently, FBVs account for only 25-30% of the total truck market while the rest are sold in chassis form to customers who then get the body built by unorganized players. The market is gradually shifting towards FBVs and we expect its penetration to increase to 50% by FY15E. We believe it is a win - win situation for both OEMs (better revenues and margins) and fleet operators (better quality & efficiency, higher payloads, warranty, lower excise). These factors based on our interaction with dealers, OEMs and organised body building units gives us confidence about the sustainable shift towards FBVs. 
m  Entry into high margin replacement market: CEBBCO is the first organized player to enter the replacement market for body building. Currently, the entire replacement market is unorganized. Considering the huge market opportunity (4mn units currently on road require replacement, based on industry data) coupled with better realization and margin profile (25-30%), makes entry in this segment a lucrative proposition for CEBBCO. Currently, the company is leveraging its promoter's existing distribution network (Tata Motors CV dealership) in Madhya Pradesh and Chhattisgarh. Similarly, it recently entered the Nagpur market.
m  Foray into wagon manufacturing to offer diversification: To further diversify its revenue stream and capitalize on its expertise in fabrication it has entered into manufacturing of railway wagons. The company’s Deori railway plant has received RDSO (Research Designs & Standards Organisation, a unit of the Ministry of Railways) approval and the company is now eligible to bid for the new wagons for the Indian Railways. We expect the company to execute 400/500 wagon for FY13E and FY14E.
m  Revenue and Earnings growth to remain strong: Driven by the significant opportunity in the FBV segment and entry into the replacement market, we expect CEBBCO to register a revenue CAGR of 29% over FY12-FY15E, EBITDA CAGR of 40% driven by margin expansion due to increasing share of high margin replacement segment and PAT to register a CAGR of 37% over the same period. We expect return rations to remain strong over this period.
m  Valuations and Recommendations: At the CMP of Rs.107, the stock is currently trading at 8.8x FY13E EPS of Rs.12.3 and 7.1x FY14E EPS of Rs.15.1. We initiate coverage with a Buy rating and a target price of Rs.146 (based on 8.5x September 2014E EPS). The management has adopted 20% dividend payout policy from FY13E onwards. Based on our FY13E and FY14E earnings, we expect dividend of Rs.2.5 for FY13E and Rs.3.0 for FY14E translating into dividend yield of 2.3% and 2.8% respectively at current levels.

Thanks & Regards, 

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