Published on 18/03/2017 12:01:41 PM | Source: Sharekhan
Positive On Sundram Fasteners Ltd - Sharekhan
* Diversified product portfolio aids in providing strong growth visibility; SFL to outpace industry growth:
Sundram Fasteners (SFL) has substantially diversified its product portfolio over the past few years. The company has introduced new products, which include Engine Components, Pump Assemblies, Powder Metal Parts, Shafts and other components. This has helped the company to shield itself from over-dependence on fasteners, besides helping it to increase the content per vehicle. The share of fasteners in SFL’s overall revenue has dipped from 43% to about 37% now. A leading position in the fasteners industry, coupled with the introduction of new products has enabled SFL to enhance the content per vehicle and significantly move up the value chain. SFL has been successful in increasing the share of business from its existing clients. Further, exports are showing a strong uptrend, with Q3FY2017 exports revenue up by 23% YoY (37% contribution to total revenue). We expect further improvement in exports revenue going forward, led by an uptrend in the US Passenger Vehicle market, enhanced supply of new products and overall market share gains. We expect SFL to outperform the industry over the next two years. Its topline is expected to clock an 11% CAGR between FY2017 and FY2019 as against the likely industry growth of about 8%.
* Margins improve significantly due to value-added products; to see further uptrend:
SFL’s standalone Operating Profit Margin (OPM) has improved impressively by 410BPS YoY to 18.7% during 9MFY2017, primarily driven by a 600BPS expansion in the gross profit margin. Higher gross margins have been propelled by the increased share of high-value products such as Engine Components and Powder Metal Parts. The enhanced share of high-margin Special Fasteners (design is customised and SFL also designs the tools) has also contributed to the improvement in margins. The impending strong growth in exports on the back of new client additions and higher share of valueadded products (Powder Metal Parts and Shafts) is expected to keep margins healthy in the coming years. The SFL management has indicated that the margin improvement is likely to sustain going ahead. We expect SFL’s standalone OPM to improve from 18.7% in 9MFY2017 to 19.3% in FY2019.
* Divests loss-making German subsidiary; consolidated earnings to improve further:
SFL completely divested its holding in the loss-making German subsidiary, Peiner Umformtechnik & Associates and booked an exceptional loss of Rs46 crore in FY2016. Following this prudent move, we expect SFL’s consolidated earnings to witness a decent improvement over the next two years. In FY2016, revenue from SFL’s subsidiaries stood at Rs765 crore compared to Rs878 crore in FY2015, while the loss was Rs12.6 crore as against a profit of Rs2.2 crore in FY2015. Going ahead, we expect the company’s subsidiaries to report a PAT of Rs14 crore in FY2017, which would enable it to increase the consolidated earnings going forward.
* Getting stronger and bigger; Re-initiate with a positive view:
We had initiated a viewpoint report on SFL on August 10, 2016 at a CMP of Rs227. Subsequently, we closed the call with a 25% profit in just one month. Nevertheless, a consistently strong performance, a much better than expected performance on the margin front in 9MFY2017 (our key investment thesis) and improved business prospects have given us confidence to reinitiate viewpoint coverage on SFL. We believe that sustained higher margins would result in the company’s return ratios remaining in excess of 25% going ahead (as against the historical average of about 14-15%), which justifies its premium valuation - in line with other niche auto ancillary companies. We expect earnings CAGR of 20% over FY2017-FY2019. We reinitiate our viewpoint coverage on SFL with a ‘Positive’ view and expect 18-20% returns in the next 6-9 months.
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