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Positive outlook prompts upgrade to BUY…

Gabriel India (GIL) reported a solid Q3FY21 performance. Net sales for the quarter were at | 536.5 crore, up 17.8% YoY, broadly following the underlying volume growth at key OEMs. EBITDA in Q3FY21 was at | 39.1 crore with corresponding EBITDA margins at 7.3% (up 20 bps YoY but down 60 bps QoQ). PAT in Q3FY21 was at | 24.5 crore, up 40% YoY.

Topline prospects healthy; EV opportunity gets bigger

GIL is a leading player in the domestic suspension space with a presence across market segments (2-W, PV, CV formed 67%, 20%, 12% of FY20 sales, respectively). The company commands 25% market share in 2-W, 18% in PV and 75% in CV as of 9MFY21. With ~85% of revenues being derived from OEM channel, ongoing production ramp up at key clients post Covid bodes well for the company. Healthy demand outlook for base user industries (2-W, PV) over FY21E-23E (in part due to low base of present year) along with bottoming out of the domestic CV cycle leads us to estimate ~16% revenue CAGR at GIL over this time period. GIL also offers a play on India’s electrification drive courtesy its presence with leading 2-W electric OEMs – with onboarding of Ola Electric for its upcoming electric 2-W offering (as sole supplier) being the latest feather in its cap. GIL has in the past clocked ~9-9.5% margins and expects touching double-digit territory over the next three years to be possible – backed by productivity improvements and focused cost initiatives. Conservatively, we build 8.0% margins for FY21E and 8.5% margins for FY23E.

Q3FY21 conference call – highlights and key takeaways

The company said that – (1) it is already in the global top five players for 2- W and CV segments , (2) GIL is set to be the sole supplier to Ola Electric for its upcoming electric 2-W (front forks, shock absorbers), (3) it wants to take aftermarket and exports combined to >20% of revenues from present ~15%, (4) productivity and efficiency increase along with cost control measures helped offset some input cost pressures (80-85% of input costs are usually passed through but with a lag), (5) cost actions have led to reduction in breakeven points from > 75% of sales to ~70% now with target placed at 65%, (6) GIL sees headroom for double-digit wallet share increase with Maruti Suzuki, (7) FY22E capex guidance is for ~| 90-100 crore (vs. ~| 50-60 crore usually) & is to be spent on backward integration, automation & technology and (8) net cash as of December 2020 end was at ~| 283 crore.

Valuation & Outlook

Over the longer term, GIL retains its ambition to be a top five shock absorber player globally. Healthy topline outlook, potential for margin improvement, strong financials (debt free b/s, double digit return ratios) and EV opportunity help us remain positive on the stock. We introduce FY23E numbers, upgrading it from HOLD to BUY with a revised target price of | 150 (i.e. 20x P/E on FY23E EPS of | 7.5; previous target price | 125).

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