Setco Automotive, Geared up for the CV upcycle :: HDFC Securities

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Geared up for the CV upcycle
We hosted the management of Setco Automotive for
a series of investor meetings. Setco is a leading
supplier of MHCV clutches with 85% market share in
the domestic market. The company’s strategy of
setting up an independent aftermarket channel and
backward integrating into ferrous castings products
could act as strong earnings growth drivers over the
next 2-3 years. Management has set an ambitious
target of scaling revenues to Rs 10bn by FY17-18.
Current valuations at 24.3x P/E on an LTM basis
appear attractive, considering the company’s
earnings are at near trough levels.
Below are key takeaways from these interactions
 Market leadership in domestic market: Setco is a
market leader for supply of clutches to the MHCV
segment with an 85% market share. The company’s
LIPE brand of clutches is well recognised across OEM
and aftermarkets. Setco is a preferred supplier to all
leading CV makers and has recently added customers
such as Bharat Benz, MTBL and MAN Trucks.
 Strengthening its business model: High dependence on
MHCV segment which saw a cyclical downturn in past
two years has resulted in a 50% drop in sales to OEMs
from FY12 peak levels. Setco’s future strategy entails
building counter cyclical and high growth revenue
streams which include expanding its product offerings
to LCV/Tractor segments and growing its independent
aftermarket business.
 Backward integration efforts underway: Setco has
entered into a 80:20 joint-venture with Lingotes
Especiales, Spain for setting up a ferrous foundry with
a capacity of 30,000 MT and total investments of Rs
1.6bn. About 1/3rd of the output would cater to Setco’s
captive requirement and balance would be available
for sale to outside customers. Besides achieving an
important strategic objective of ensuring steady supply
of castings for its internal requirements, the
management believes the project is fairly lucrative with
a potential to generate around Rs 2.3bn of revenues
and above 20% EBITDA margins at peak utilisation.
 Subsidiaries’ performance to remain soft: Setco’s two
key subsidiaries in UK and USA were essentially formed
during its acquisition of the LIPE Clutch division from
Dana Corp and Haldexs’ facility in USA. Both the
subsidiaries are currently incurring losses. These
subsidiaries undertake assembly and marketing
activities for Setco’s products, while bulk of the value
addition and margins are retained by the parent entity.
 Competitive landscape: Competition is largely from
global players who have set up operations in India.
Component majors such as Eaton Corp (USA), Valeo
(France), Sachs (Germany) and LUK (Germany) have
presence in India; but they have a larger focus on PV,
LCV and Tractor segments.
 Capex plans: Setco has already invested ~60-65% of
the total Rs 1.6bn investment for its ferrous foundry
facility with the balance likely to be invested by
Mar’15. Over FY16/17, Setco’s capex spends are likely
to be moderate in the range of Rs 100-150mn/year
towards maintenance capex, technology upgradation
and any de-bottlenecking efforts.

LINK
http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3010445