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Play on cyclical revival but fairly valued!
• Setco Auto (Setco) put up an impressive quarterly performance in
Q1FY15 with topline growing ~50% YoY to | 95.4 crore on the back
of strong production volumes in the M&HCV segment and improved
realisations on the back of product mix and increase in OEM prices
• Margins at 11.8% improved ~300 bps QoQ due to an improvement
in gross margins
• PAT at | 4.5 crore grew ~10% YoY despite the strong improvement
in topline, due to lower other income on a YoY basis
• The stock price has witnessed a strong rally in the past month (up
~50%), which has factored in most of the near term positives
Dominant supplier to M&HCV segment to benefit from cyclical upturn!
Setco is India’s largest clutch supplier for the MHCV segment with ~80%
share in the OEM segment. On the global front, Setco ranks among the
top five clutch manufacturers. Setco is not only the preferred clutch
supplier for OEMs but in majority of the cases is also the lone supplier
(100% - Tata Motors, Eicher Motors) while it supplies ~65% of Ashok
Leyland’s volumes. With a change of guard at the Centre and expectation
of a revival in the capex cycle, the depressed M&HCV segment has begun
showing signs of revival. Also, with the mining ban getting revoked &
fresh mining leases granted, the recovery in truck volumes may continue.
Hitherto strong replacement demand to ease off from H2FY15E onwards!
Setco’s volumes have largely held up well owing to strong replacement
demand. However, with the M&HCV industry seeing strong de-growth in
volumes in FY13, FY14, which saw the industry size halving from FY12
levels, replacement demand is likely to slow down from H2FY15E
onwards. The replacement segment is a high margin one as the company
had been selling through spares channel of OEMs. However, from last
year onwards, Setco has set up an additional channel for distribution that
is likely to have initial set-up costs. This would not allow strong margin
expansion from this segment as growth slows.
Low return yielding non-core investments diluting return profile!
Setco being in a cyclical business has suffered the vagaries of the
downcycle with margins dropping off to ~10% from the highs of FY11,
FY12 (18-19%). Consequently, return ratios have also deteriorated from
peak levels of ~37% RoE, ~28% RoCE to current levels of ~12% RoE,
~7% RoCE. With expectation of a revival in volumes likely to boost
margins owing to operating leverage, Setco’s return ratio profile is likely
to improve from current levels but is unlikely to reach the earlier peak as
the company has been steadily increasing investments in associate
concerns like Transstadia, Lava Cast, Setco Engineering to the tune of
~| 50 crore. This yields lower returns vis-à-vis its core business return
ratios, thereby diluting the return ratio profile.
Sharp stock rally captures most positives; advise to book profits!
We had initiated coverage on the stock with a fair value estimate of | 150.
With an improvement in sentiment on early signs of a recovery in OE
demand, the stock price has seen a sharp rally and captured most
positives accruing from the revival in the industry. At ~13x P/E FY16E
EPS and ~9x EV/EBITDA, the stock appears fairly valued considering the
business and financial profile. Thus, although the prospects of both
topline, bottomline growth remain on a cyclical upturn, considering the
high valuation multiples, we would advise our investors to book profits at
current levels.
�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��
��
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Play on cyclical revival but fairly valued!
• Setco Auto (Setco) put up an impressive quarterly performance in
Q1FY15 with topline growing ~50% YoY to | 95.4 crore on the back
of strong production volumes in the M&HCV segment and improved
realisations on the back of product mix and increase in OEM prices
• Margins at 11.8% improved ~300 bps QoQ due to an improvement
in gross margins
• PAT at | 4.5 crore grew ~10% YoY despite the strong improvement
in topline, due to lower other income on a YoY basis
• The stock price has witnessed a strong rally in the past month (up
~50%), which has factored in most of the near term positives
Dominant supplier to M&HCV segment to benefit from cyclical upturn!
Setco is India’s largest clutch supplier for the MHCV segment with ~80%
share in the OEM segment. On the global front, Setco ranks among the
top five clutch manufacturers. Setco is not only the preferred clutch
supplier for OEMs but in majority of the cases is also the lone supplier
(100% - Tata Motors, Eicher Motors) while it supplies ~65% of Ashok
Leyland’s volumes. With a change of guard at the Centre and expectation
of a revival in the capex cycle, the depressed M&HCV segment has begun
showing signs of revival. Also, with the mining ban getting revoked &
fresh mining leases granted, the recovery in truck volumes may continue.
Hitherto strong replacement demand to ease off from H2FY15E onwards!
Setco’s volumes have largely held up well owing to strong replacement
demand. However, with the M&HCV industry seeing strong de-growth in
volumes in FY13, FY14, which saw the industry size halving from FY12
levels, replacement demand is likely to slow down from H2FY15E
onwards. The replacement segment is a high margin one as the company
had been selling through spares channel of OEMs. However, from last
year onwards, Setco has set up an additional channel for distribution that
is likely to have initial set-up costs. This would not allow strong margin
expansion from this segment as growth slows.
Low return yielding non-core investments diluting return profile!
Setco being in a cyclical business has suffered the vagaries of the
downcycle with margins dropping off to ~10% from the highs of FY11,
FY12 (18-19%). Consequently, return ratios have also deteriorated from
peak levels of ~37% RoE, ~28% RoCE to current levels of ~12% RoE,
~7% RoCE. With expectation of a revival in volumes likely to boost
margins owing to operating leverage, Setco’s return ratio profile is likely
to improve from current levels but is unlikely to reach the earlier peak as
the company has been steadily increasing investments in associate
concerns like Transstadia, Lava Cast, Setco Engineering to the tune of
~| 50 crore. This yields lower returns vis-à-vis its core business return
ratios, thereby diluting the return ratio profile.
Sharp stock rally captures most positives; advise to book profits!
We had initiated coverage on the stock with a fair value estimate of | 150.
With an improvement in sentiment on early signs of a recovery in OE
demand, the stock price has seen a sharp rally and captured most
positives accruing from the revival in the industry. At ~13x P/E FY16E
EPS and ~9x EV/EBITDA, the stock appears fairly valued considering the
business and financial profile. Thus, although the prospects of both
topline, bottomline growth remain on a cyclical upturn, considering the
high valuation multiples, we would advise our investors to book profits at
current levels.
�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��
��
LINK
http://content.icicidirect.com/mailimages/IDirect_SetcoAuto_CoUpdate_Sept14.pdf
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