* Rico’s topline to grow strongly at a 15% CAGR on account of robust order book and foray in to new segments:
Rico Auto Industries (Rico) has embarked on an aggressive growth plan, which encompasses foray into new areas such as aftermarkets (targets Rs.100 crore revenue over 2-3 years) for two wheelers and four wheelers, fast-growing defence business (targets revenue to grow 3x to Rs.30 crore by FY2018) and reentry in the clutch segment. Moreover, the company’s current healthy order book position at Rs.280 crore provides ample visibility on topline growth. Given the buoyant outlook for the two-wheeler segment, management expects the existing alloy wheels business to grow by 50% to ~Rs.120 crore by FY2018.
* Margin expansion expected due to better product mix and operating efficiencies:
Rico is in the midst of a restructuring exercise, which aims at substantially improving its operational efficiencies. Also, new growth avenues (foray into aftermarkets and defence) coupled with incremental orders at better pricing would aid margin expansion. This coupled with robust topline growth is likely to generate strong operating leverage. Thus, we expect the company’s OPM to expand by 180BPS over the next two years.
Over the past 1-2 years, Rico has successfully restructured its subsidiary operations and has hived off loss-making companies. Going ahead, on the domestic front, strong outlook for the passenger segment, successful roll-out of GST and upcoming safety regulations are set to open up huge opportunities for ancillary companies such as Rico. Further, robust order book provide revenue and earnings growth visibility and are likely to lead to rerating of the stock. Rico’s earnings growth at a 35% CAGR over FY2017-2019 makes it amongst the fastest-growing ancillary companies.
Maintain Buy with a revised PT of Rs94: We have revised our earnings estimates upwards by 12%/25% for FY2018/ FY2019 to factor in the incremental growth from new avenues coupled with marked margin improvement. Also, RoE is likely to improve from 9.5% in FY2017 to 14% by FY2019, thus making it a candidate for re-rating. We maintain our Buy recommendation on the stock with a revised PT of Rs.94 (14x FY2019E earnings).
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