Denso India (CMP: Rs.103/ TP: Rs.136/ Upside: 32%)
Denso is a subsidiary of Denso Corp., a US $30bn enterprise, which has strong
relations with global auto majors, viz. Suzuki, Honda and Toyota. Besides strong
relations with global majors, Denso Corp. provides strong financial backing and
technological knowledge to Denso, which will help the company to expand
capacity as well as add new products to its portfolio in the future to cater to the
growing domestic demand.
With the huge spurt in demand for automobiles, OEMs have witnessed a
supply-side constraint from auto ancillary companies. This has resulted in a
considerable increase in the bargaining power of these companies. Denso on the
back of its strong balance sheet is likely to be a preferred supplier going forward.
On the back of strong growth witnessed by the OEMs, we expect Denso to witness
a 17% CAGR in sales over FY2010-12E. Given the company’s MNC profile and
strong product range, current margins are too low and are expected to show
material improvement. We have factored in 7.3% EBITDA margins in FY2012E vs.
4.8% in FY2010, the drivers being localization, increased bargaining power and
measures by Bank of Japan to curb further Yen appreciation. Consequently, the
company’s net profit is expected to increase at a 49% CAGR over FY2010–12E.
Denso has traded at a five-year average of 9x one-year forward earnings.
Currently, the stock is trading at 6.8x FY2012E EPS and we value the company at
9x FY2012E EPS. We recommend a Buy rating on Denso with a Target Price of
Rs136, implying an upside of 32%.
