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New client addition compensates slowing exports

Rolex Rings reported in line numbers for 2QFY23. Net sales were up 12% YoY, in line with JMFe, given healthy growth across both segments. Domestic segment (47% of sales) continued to grow at healthy pace led by pickup in demand in automotive segment, but export (52% of sales) face softness due to slowdown in Europe (25% of the revenue) as some customer deferred deliveries by 15-20%. Gross margins sustained at 53.1% (+100bps QoQ), led by price pass through and better sales mix, leading to EBITDA growth of 12% YoY (4% below JMFe) and margins came in at 22%. Net profit grew by 50% YoY and flat QoQ (6% above JMFe). We expect ROLEXRIN to clock sales/EPS CAGR of 17%/27% over FY22- 25E as we expect a) increase in wallet share with existing customer base, b) transition to EVs to provide next leg of growth, c) order build up from existing customers and new customer addition, d) continuous increase in input cost to accelerate shift in capacities from Europe to India and e) further improvement in margins with installation of solar power plant which will save INR150-170mn annually. We maintain BUY with TP of INR 2,500 (25x FY25E EPS).

* Robust performance across segments: Net sales were up 12% YoY to INR2.9bn, as contribution from bearing segment stood at 54% (vs 60% in FY22) and contribution from automotive segment stood at 46% (vs 40% in FY22). In 2QFY23, revenue mix by end-user industries was dominated by PV (42.3% vs 40% in FY22), followed by CV & HCV (29% vs 26% in FY22), Industrial (24% vs 26.4% in FY22) and BEV & Hybrid (4.7% vs 7% in FY22). Management highlighted that they continue to receive new inquiries from existing as well as new customers in both bearing rings and auto components segment. However, they indicated that some reduction in orders was witnessed from European customers, which was compensated by addition of new customers.

* Favourable mix and price pass through drives margins: Gross margins remained flat YoY to 53.1% in 2QFY23 (+100bps QoQ). Despite lower exports sequentially, gross margins improved due to price pass through across customers and a robust mix in domestic segment, with higher automotive share. EBTIDA reported growth of 12%YoY and flat QoQ to INR637mn, which was 4% below JMFe, as margins stood at 22% (20 bps below JMFe). However, PAT grew by 50% YoY, due to higher other income (forex gain of INR50mn) and lower effective tax rate (19% vs 28%) due to deferred tax reversal.

* Higher input cost in Europe could drive business to India: Management highlighted that continuous rise in energy costs in European region is likely to drive business to Indian companies and expect increased traction in next 8-10 months. Few existing European customers of Rolex are shutting their plants and shifting their production to India. Management expects sales from new customers added in past 2 quarters to commence from Jan’23

* Maintain BUY with TP of INR2,500: We forecast 27% EPS CAGR over FY22-25E, driven by a) strong current order book, b) addition of new customers, c) installation of solar power plant to aid margin expansion. Maintain BUY with TP of INR2,500 (25x FY25E EPS).

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