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Disappointing quarter; volume outlook tepid for FY21E
Jamna Auto Industries (JAI) reported yet another disappointing set of numbers in Q4FY19 which were below our estimates. Its revenue de-grew by 9% YoY (+11.6% QoQ) led by volume decline in the overall CV segment during the quarter. The margins were impacted due to higher raw material cost and negative operating leverage as it contracted ~227bps YoY at 12.7%. Led by decline in revenue, dismal operational performance and higher tax rate (+474bps YoY), net profit declined 28.6% YoY. We have downgraded our estimates for FY20E and FY21E given the continued weakness in the CV volumes. While we expect the volume growth to pick up towards H2FY20 led by pre-buying before BS-VI implementation, but expect downturn in industry volumes in FY21E. Nonetheless, we recommend accumulate on the stock with a revised target price of Rs. 62.
Q4FY19 Result Update:
* JAI’s consolidated net revenue declined 9% YoY (+11.6% QoQ) to Rs. 543 cr which was marginally lower than our estimates, given the slowdown in the overall CV volumes. For FY19, JAI has delivered a healthy growth of 22.8% driven by 22% increase in overall CV production. JAI has continued to maintain its market share of 70% amongst OEMs.
* The operating profit declined 22.8% YoY (+8.6% QoQ) to Rs. 69 cr which was below our estimates, while margins contracted ~227bps to 12.7%. The contraction in margins was mainly due to increase in raw material expense (+213bps YoY) and negative operating leverage during the quarter.
* Led by decline in revenue, dismal operational performance and higher tax rate (+474bps YoY), net profit declined 28.6% YoY to Rs. 33.4 cr. For FY19, despite healthy revenue growth, PAT grew by a meagre 9.7% due to lower than expected operational performance, higher interest cost and higher tax rate.
Outlook & Valuation:
We remain cautiously optimistic on the CV industry growth prospects given the continued slowdown witnessed in volume growth due to liquidity issues amongst NBFCs and reduced demand of high tonnage trucks post the revised axle load norms. We expect a reasonable turnaround in H2FY20 led by pre-buying due to implementation of BS-VI norms. However, the volume growth outlook post FY20 looks tepid as increase in cost of vehicles (due to BS-VI implementation) and slower than expected economic growth is likely to weigh on volumes. Nevertheless, in the long run JAI is well placed to benefit from revival in economy and increase in infrastructure spending coupled with its dominant market share of ~70% in conventional leaf springs and ~95% in parabolic spring’s market in India. Additionally, increased benefits from GST and company’s strong branding will further increase its presence in the aftermarket segment, which is currently dominated by unorganized players. The company aims to increase its market share in the replacement market from 15% currently to 30-35% over the next few years. Strong management experience, healthy dividend payout ratio (25-30%), high return ratios (>30%) and negligible debt levels make JAI one of our preferred pick in the sector. However, given the continued weakness in the CV volumes and tepid outlook for FY21E, we have downgraded our estimates for FY20E and FY21E. Nonetheless, we recommend accumulate on the stock with a revised target price of Rs. 62.
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