Setco Automotive: Buy :: Business Line

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The Setco Automotive stock is a good bet on the turnaround in commercial vehicle (CV) sales.

Setco’s market leadership in truck and bus clutches and a diversified clientele give good visibility to earnings growth over the next one-two years.

Despite trebling in the past year, the stock trades at a reasonable 24 times the trailing 12- month earnings, at half the valuation of other component makers. But we recommend limited exposure considering that the company’s market capitalisation is only ₹639 crore.

Setco supplies clutches to light, medium and heavy trucks and buses through the ‘Lipe’ brand and has about 85 per cent market share.

The company caters to the entire requirement of Tata Motors, Volvo and Bharat Benz besides supplying to Ashok Leyland, Eicher and AMW.

The turnaround in commercial vehicle sales seen this fiscal bodes well for the company.

From a 25 per cent drop in volumes in 2013-14, medium and heavy trucks, and buses have grown 5 per cent this fiscal.

Monthly average truck rentals have also been on the mend, a reversal from the weakness of the past two years. In the months to come, a pick-up in industrial growth and a rate cut should further boost demand for CVs.

The company recently expanded its offering to light commercial vehicles and is also getting into tractor clutches. This diversifies the revenue base as tractor sales are independent of the CV cycle.

Sales network

In addition to selling spares through authorised dealers, Setco is building its own sales network too. Sales from its own network accounts for 10 per cent of revenues. This brings two advantages.

Clutch replacement demand from the open market will help keep volumes ticking at a time when auto sales slow, and, two, it will bring higher margins as bargaining power of auto part suppliers is generally higher in independent sales.

Margins will also get a boost from backward integration.

In May 2014, Setco entered into a joint venture with Lingotes Especiales of Spain to make machined ferrous castings that go into the manufacture of various components.

Better times

Setco’s financials have been looking up in the last two quarters.

From low single-digit growth in the March 2014 quarter, net sales grew 61 per cent year-on-year to ₹119 crore for the quarter ended September 2014.

Net profit grew 44 per cent to ₹9.95 crore during this period. From about 6 per cent last year, the operating margin has more than doubled to 13 per cent.