Sundaram Clayton report :: HDFC Securities

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Steady performer
We hosted the management of Sundaram Clayton
Ltd (SCL) for a series of investor meetings. SCL has a
long standing track record of delivering high quality
components to a reputed base of customers. SCL
currently holds a 57.4% stake in TVS Motor, which is
valued at Rs 67.3bn. While SCL’s earnings growth
may accelerate with a cyclical demand upturn, its
asset heavy business would restrict ROCE expansion
beyond early double digits. Thus, valuation accorded
to the core business is unlikely to scale above 10-12x
forward earnings. Excluding the base business
valuation (~15-20% of EV), implied holdco discount
for its stake in TVS is significantly high at ~55-58%.
Below are the key takeaways from these interactions
 Proven track record: SCL has strong and well
established capabilities in manufacturing aluminum die
casting products. The company engages with OEMs at
the design stage and typically, new product
development requires 18-24 months of engagement.
 Diversified revenue stream: SCL derives ~55% of its
revenues from domestic sales and balance 45% from
exports. Almost 50% of its revenues come from the
HCV segment (all from exports), 30% from passenger
vehicles and balance 20% from two-wheelers (supplies
to TVS Motor).
 Exports to marquee customers: SCL exports aluminum
die cast products to the Cummins group in USA and the
Volvo group in Europe. Given SCL’s longstanding track
record of delivering high quality components, the
company has a wallet share of 25% with Cummins and
18-20% with Volvo.
 Growth drivers: SCL has been fairly selective in adding
new customers. In the recent past, SCL has
commenced supplies to Bharat Benz in India and also
to the Daimler group in Germany. SCL’s focus lies in
adding content per vehicle to expand its revenue base.
SCL is currently working on substituting aluminum with
magnesium for light-weighting its casted products.
However, this is still in development stage and would
take several years to reach commercial production.
 Scope for margin improvement: Per the company,
initial margins on newer products tend to be lower.
New products introduced in past few years have now
stabilized in terms of reaching desired quality levels
and having reached threshold volumes. Further, SCL’s
power and fuel costs could come off with a decline in
furnace oil prices, even though part of this will be
offset by recent power tariff hikes in Tamil Nadu.
 Hedging policy: SCL derives ~50% of its revenues from
exports in foreign currency and it largely hedges its
exposure by importing bulk (~80-85%) of its raw
material requirement. The remaining small net
exposure is covered on a rolling three month basis by
entering into forward contracts.
 Capex plans: SCL’s present capacity stands at ~50,000
MT and operates at 80-85% utilisation levels. The
company plans to invest Rs 1.5bn (of which 0.8 to 1bn
towards maintenance capex) over the next 18-24
months and expand its capacity by 10,000 MT

LINK
http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3010438