Published on 18/01/2020 12:10:25 PM | Source: SPA Securities Ltd

Buy Steel Strips Wheels Ltd For Target Rs.1070 - SPA Securities

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Steel Strips Wheels Ltd (SSWL) reported revenue of INR 3.4 bn (-28.8% YoY & -5.1% QoQ), EBIDTA of INR 427 mn (down 30.8% YoY, up 3.1% QoQ) with EBIDTA margin (excl. Other Income) at 12.4% (12.8% YoY). Reported PAT stood at INR 63 mn (down 67.9% YoY and down 18.2% QoQ). RM cost as % of sales improved to 60.2% (65.6% YoY) while employee expenses decreased 14.6 bps to 10.4% and other expenses increased 591 bps to 16.9%.


Revenue declined 28.8%, in line with production trend at clients.

SSWL's 3QFY20 revenue was down 28.8% YoY to INR 3.4 bn. The fall was largely attributable to decline in volumes due to production cut taken at key customers like Ashok Leyland, Tata Motors and Maruti Suzuki. Management said that it was the worst quarter for them, as CV OEM's focus was on inventory clearance. SSWL has seen a strong growth in CV orders in the month of November and December. Alloy wheel facility has achieved a monthly run rate of 30000 wheels in December and 60000 wheels in January. With rampup in order book, management expects sales of 1.8 lac wheels in 4Q FY20. The company has added two more clients in alloy wheel segment during the quarter. Capex guidance maintained at INR 500mn in FY21 and INR 400mn in FY22.


EBITDA Margin deteriorated 35 bps YoY due to negative operating leverage despite increasing sales from high margin alloy wheels business and various cost cutting measures.

has reported EBITDA of INR 427 mn (down 30.8% YoY) and EBITDA margin deteriorated by 35 bps YoY to 12.4% despite higher contribution of High margin alloy wheels and tractor wheels. RM cost adjusted to reclassification of expenses improved ~100-200 bps mainly on the back of improved product mix and softening commodity prices. Employee cost reduced by 29.8% as company layed off contractSteel Strips Wheels Ltd.wheels).SSWL is in advanced stages of discussion with various OEMs in US and Europe, with deals getting converted, we expect exports to drive volumes further.


Outlook & Valuation

SSWL has graduated from merely being a component supplier to collaborate with OEMs from the concept stage to improve the aesthetics of the wheel. While steel wheel business is expected to grow steadily, newer capacities for CV and PV alloy wheel provides visibility of higher growth. With multiple levers in place both for volume growth and margin expansion, Revenue/EBITDA /PAT are expected to grow at a CAGR of 15.8%/23.7%/84.7% between FY20E-22E. At CMP of INR 759, SSWL is trading at a 6.0x its FY22E EBITDA. We have valued stock at 8x FY22E EBITDA and recommend a BUY with a price target of INR 1070, representing an upside of ~53.8%.


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