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  • Stock Recommendation | TALBROS AUTOMOTIVE COMPONENTS (TBA) – BUY – Target Price : 400

    Publish date: JANUARY 3, 2019

    TBA reported high growth in revenue and PAT in 1HFY19. In the past few months, volume growth has slowed down and is likely to keep company’s performance subdued (on a QoQ basis) in the near term. However, as demand recovers, we expect growth to pick-up for the company. Further execution of orders won by the company in different businesses is expected to drive revenue and earnings growth for the company in FY20. The company is working on BSVI related gasket requirement and is confident that per vehicle gasket requirement will see meaningful increase with BSVI compliant vehicles getting launched. Operational leverage, internal efficiencies and input cost pass through are expected to positively contribute to EBITDA margins in FY20.

    We expect healthy revenue and earnings growth for the company over FY18-FY20. At the CMP of Rs224, the stock is trading a PE of 7.8x on FY20E expected. We retain BUY on the stock with unchanged price target of Rs400.


    TBA is the market leader in the gasket business and holds ~40% market share. The company has strong presence in the two wheeler commercial vehicle and the agri/offloader segment and these three segments account for more than 90% of the standalone gasket segment revenue. Company expects the current slowdown in demand to get offside to some extent from growing exports and increased OEM spares business (TBA is gaining market share in this segment). In exports, TBA has secured orders from Cummins (US and UK), Zetor Tractors and a non-auto conglomerate. On the back of investment in technology, TBA is gaining market share in the domestic gasket segment. The company is working on BSVI related gasket requirement and is confident that per vehicle gasket requirement will see meaningful increase with BSVI compliant vehicles getting launched. From FY20 onwards, additional gasket requirement and increased price of gasket (BSVI compliant gasket for the commercial vehicle segment) related with BSVI implementation will drive revenue. In FY20, TBA will also start executing the heat shield order received from a European OEM. Further, expected pre-buying of vehicles ahead of BSVI implementation can provide additional impetus to growth in FY20.


    TBA’s forging division revenue have grown strongly in the past two years, backed by new order wins, and the growth momentum is likely to continue in FY19 and FY20. The company is adding new presses – 500T to start operations in 4QFY19 and 2500T to likely start operations in 1HFY20. In the past two years, company has reported strong revenue growth (35% CAGR over FY16-FY18) in the forging business, led by new business wins. In 1HFY19, the company’s forging segment revenue grew by 86% YoY. Given OEM slowdown, sequential performance in the near term is likely to be subdued. However, execution of new orders is expected to translate into growth for the company over the medium to long term. In FY19, execution of BMW order has been the key revenue driver for the forging business for TBA. Company has started executing Dana Spicer India order in 2HFY19; the ramp-up will happen in FY20 (annual order size of Rs350mn). TBA’s strategy in this business is to move up the value chain by getting into higher tonnage parts. TBA generates almost equal revenues from the domestic and export market in this division.


    Nippon Leakless Talbros Private Limited (NLT) is a joint venture company between Nippon Leakless Corporation (NLK) Japan and TBA. LTL supplies 70% of Hero MotoCorp’s (HMC) and 100% of Honda Motorcycle Scooters India (HMSI) gasket requirement. Revenue growth in this business broadly reflects the volume performance of HMSI and HMC. In FY19YTD (till November), HMC and HMSI have reported 9% and 8% growth in production. Over the longer term, we expect HMSI to outperform domestic industry volume growth. We expect the company to witness steady revenue growth in this joint venture.


    Magneti Marelli Talbros Chassis Systems Pvt. Ltd., (MMT) is a 50:50 joint venture between Sistemi Sospensioni S.p.A., Italy and TBA. This JV manufactures chassis components like control arm and others. In the domestic market, Maruti Suzuki and Tata Motors are key customers for the JV. With Maruti Suzuki, the JV enjoys 40% SOB and with Tata Motors, the JV has 100% SOB for parts supplied. In exports, this JV won an order from JLR. Future growth in this JV is expected to be driven by improved volumes by domestic clients, ramp-up of order of JLR order and expected high volumes of RE60. Company has highlighted that Bajaj Auto has indicated towards higher volumes (~2,500 units per month) of RE60 from January 2019. On the back of above mentioned reasons, we expect strong revenue growth for this JV in FY19/FY20.


    TBA’s EBITDA margin improved from 9.7% in FY17 to 10.4% in FY18. Despite raw material cost pressures, TBA further expanded EBITDA margin to 11.2% in 1HFY19. Increase in conversion cost initiated by the company in the past few months helped the company compensate for rise in raw material cost. Margins also received support in 1HFY19 from cost cutting measures and forex benefits. Going ahead in FY20, EBITDA margins can improve further from input cost pass through, cost cutting measures and operational leverage from volume growth. For raw material cost change, pass through with customers happens with 3-6 month lag. Company continues to work on internal efficiencies and that is likely to contribute to margins. Operational leverage from expected healthy revenue growth for the company is also expected to add to the company’s margins. In our estimates, we factor EBITDA margin of 11.3%/11.7% for FY19/FY20 respectively.


    In 1HFY19, TBA’s consolidated revenues grew by 39% YoY (consolidated revenue includes standalone gasket and forging revenue; as for joint venture, under IndAS, the net profit is taken in share of profit from JV/associates). Forging business revenue grew by 86% YoY in 1HFY19. Amongst JV’s, MMT and TMR reported 38% and 36% YoY growth in revenues respectively in 1HFY19. Despite raw material cost pressure, gross margins remained unchanged as the company initiated conversion cost increase with its clients. Further, strict control over employee cost and favourable forex helped the company expand its EBITDA margin from 9.3% in 1HFY18 to 11.2% in 1HFY19. Share of profit from JV’s increased by 32% YoY; led by strong performance of MMT JV and turnaround in TMR JV. Adjusted for exceptional income of Rs22mn reported in 1HFY18, TBA’s net profit in 1HFY19 grew by 84% YoY to Rs138mn.


    We expect TBA’s revenues and earnings to receive impetus from BSVI implementation, entry into heat shields and new order wins. On the margin front, there are opportunities for expansion through cost control and operating leverage.


    Company’s vision 2020(FY20) includes achieving revenue of Rs5.25-5.75bn, EBITDA margin of 12-13% (including other income), adjusted PAT of Rs325-350mn and RoCE in excess of 15%. In 1HFY19, company achieved revenue of Rs2.51bn, EBITDA margin of 11.2% (11.9% including other income) and PAT of Rs138mn.


    At the CMP of Rs224, the stock is trading a PE of 7.8x on FY20E expected. We retain BUY on the stock with unchanged price target of Rs400.


    Talbros Automotive Components Limited, the flagship manufacturing company of the Group, manufactures automotive & industrial Gaskets in collaboration with Coopers Payen of UK. Currently company manufactures gaskets & heat shields, forgings, suspension systems, anti-vibration components and hoses. TBA has three joint ventures – Nippon Leakless Talbros Pvt. Ltd (JV partner - Leakless Corporation – Japan), Magneti Marelli Talbros Chassis Systems Pvt. Ltd. (JV partner - Magneti Marelli - Italy) and Talbros Marugo Rubber Pvt. Ltd. (JV partner - Marugo Rubber - Japan). In terms of revenue (as per Indian Gaap), 60% of revenues comes from gaskets, 26% from forging, 10% from MMT JV and 4% from TMR JV.


    BUY - We expect the stock to deliver more than 12% returns over the next 12 months
    ACCUMULATE - We expect the stock to deliver 5% - 12% returns over the next 12 months
    REDUCE - We expect the stock to deliver 0% - 5% returns over the next 12 months
    SELL - We expect the stock to deliver negative returns over the next 12 months
    NR - Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for information purposes only.
    SUBSCRIBE - We advise investor to subscribe to the IPO.
    RS - Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there is not a Sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon.
    NA - Not Available or Not Applicable. The information is not available for display or is not applicable
    NM - Not Meaningful. The information is not meaningful and is therefore excluded.
    NOTE - Our target prices are with a 12-month perspective. Returns stated in the rating scale are our internal benchmark.


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