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Fastening growth

We initiate on Sundram Fasteners with an ADD recommendation. Volumes are back to pre-COVID levels for several segments, including cars, tractors and 2Ws. We expect sales to grow in mid-teens over FY21-23, led by a cyclical uptick in India and abroad. Sundaram's enhanced competencies have allowed it to diversify into multiple products. It is also expanding in the non-auto segment. It has lowered dependence on high tensile fasteners – with contribution reducing from 80% of revenues earlier to 31% currently. Sundram's diversified customer and product mix enable it to enjoy robust profitability - the elevated margins (16-18) and high ROEs (in mid-teens) are a function of its mix across cars, tractors, CVs, exports and aftermarkets.

* Sales to grow in mid-teens over FY21-23: Following the initial COVID impact, demand trends seem to be improving with volumes back to pre-COVID levels for several segments, including cars, tractors and two-wheelers. The US market sales are reviving as well and are higher QoQ. We expect mid-teens sales growth over FY21-23, aided by the cyclical uptick, both in India as well as overseas markets.

* Diversification initiatives: The non-auto segment is below 5% of revenues currently. Sundram is keen to expand its presence in this segment by focusing on wind energy, defence and aerospace segments. It is also developing products for the EV segment to address the changing requirements of the automobile industry.

* Developing in-house capabilities: Sundram has refrained from forming JVs with foreign partners and has instead built its competence. This has enabled the company to develop new products and lower the dependence from high tensile fasteners (contribution from this product has reduced from 80% of revenues earlier to 31% currently). The component manufacturer has expanded in new segments, including pumps and assemblies, transmission parts, hot forgings, cold extruder parts, etc.

* Focus on return ratios: Sundram Fasteners' diversified customer and product mix enable it to drive robust profitability. The elevated margins (16-18%) and high ROEs (in mid-teens) are a function of its well spread base across cars, tractors, CVs, exports, and aftermarkets.

* Price target, valuation: We initiate coverage on Sundram Fasteners with an ADD rating and set a target price of Rs 565, at 27x FY23E EPS, which is at a 10% premium to its 5-year average P/E. Post the run-up in stock price, we would recommend accumulating the stock on every correction. Key risks: slower-than-expected recovery and rapid shift towards electric vehicles.

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