Setco Automotive M&H CV slowdown to eat into sales; valuation inexpensive; Hold :: Anand Rathi

Setco Automotive
M&H CV slowdown to eat into sales; valuation inexpensive; Hold
Key takeaways
Sales slowdown mirrors industry slump. We expect Setco Automotive’s
sales in 3QFY14 to have declined 12.8% yoy, to `758m, affected by the
sharp decline in offtake in the M&H CV OEM segment generally;
volumes in this segment would decline ~25%. To counter the slowdown
in domestic OEM sales, management is now focusing on exports and the
aftermarket. In FY13, the aftermarket and exports grew 16% and 31%
respectively, while OE sales declined 31%.
Margins and profitability to continue under pressure. We expect the
EBITDA margin, at 10%, to be down; it would still be down 710bps yoy. On
the lower fixed-cost absorption, EBITDA is expected to dip 48.8% yoy.
Hence, we expect PAT to fall 44.3%, to `54m. With the expected rise in
volumes of high-margin after-market clutches, the margin would hold at the
present level.
Short-term pain to continue, long-term brighter. We expect FY14 sales to
be flat, with a 200-bp drop in the EBITDA margin and profit slipping 16.7%.
However, in FY15, we expect the company to be a key beneficiary of the CV
cycle recovery, with increasing exports and good aftermarket potential as
added positives. We foresee 24% revenue growth, margins bouncing back
190bps to 14.1% and the RoCE rising from 15.3% to 18.5% over FY13-15.
Our take. We expect the company’s financial performance to disappoint in
FY14 as well. A recovery and upswing in the CV cycle in 2HFY15, however,
would see Setco as the foremost beneficiary. Its short-term prospects
continue to be dim. We maintain our Hold rating on the stock. We assign a
one-year-forward PE of 6x FY15e and arrive at a target price of `88. Risks.
Slump in auto demand, rise in commodity prices, insufficient price hikes by
OEMs.

��

-->