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Tailwinds in place for profitable growth

We recently visited various facilities of Sansera Engineering (SEL) and interacted with the senior management to understand their business strategy and outlook. Following are the key takeaways: a) SEL is aiming towards ~Rs35bn revenue by FY25 vs Rs23bn in FY23 with growth being driven by domestic 2W demand revival, return of growth in export markets and expansion of the aerospace segment; b) Bidadi plant, after clocking Rs2.4bn revenue in FY23, is targeting to double the figure by FY25 with a new 4,000T press coming in along with existing four presses running at full capacity on the existing orderbook; c) post reaching ~Rs900mn revenue in aerospace in FY23, SEL is aiming to take it up to Rs2.5bn by FY25 driven by its newly constructed facility; f) SEL has no plans to enter the casting space and, with forging needs per 2W set to be more than casting value addition, SEL will try to add new forging parts under both steel and aluminum forging capabilities. Maintain BUY on the stock keeping estimates unchanged and with a DCF-based target price of Rs1,033, implying 18x FY25E earnings. Change in price target is driven by rollover of earnings by a quarter.

Key takeaways from our interaction with management:

* SEL has invested ~Rs3.5bn towards gross block for Bidadi plant till now with potential peak revenue of ~Rs5bn-5.5bn p.a. from that investment as against Rs2.4bn revenue in FY23 from that facility. SEL expects revenue to ramp up to Rs4.8bn-5bn by FY25 from the Bidadi facility, which has both steel and aluminum forging capabilities. By putting a new 4,000T press in this plant, the company is aiming to make large steel crankshafts in- house for 6-litre genset engines in addition to making large aluminum components for 2Ws for OEMs like Royal Enfield, KTM, etc. Aluminum forging revenue stood at Rs600mn in FY23 and SEL aims to take it to Rs1.5bn by FY25.

* SEL has no plans to enter the casting business in the foreseeable future, but will focus towards diversification of the forging business only. Value addition in forging is similar to that in casting in ICE 2Ws, but in EVs it tilts more towards forging.

* The new aerospace facility’s peak revenue is estimated at Rs3.5bn with machineries from the older plant getting shifted here. As against Rs900mn aerospace revenue in FY23, SEL is targeting Rs2.5bn revenue from the segment by FY25. The older aerospace plant space would be used for auto parts expansion down the line.

* SEL is looking forward to grow its exports by ~40-50% in FY23 led by expansion in the aluminum forging and aerospace businesses along with addition of new businesses from Polaris ATV, Tesla, CNH, and overall growth in key markets.

* Company is aiming to improve EBITDAM from ~16% currently to ~18-19% by FY25 through improvement in exports and aerospace mix, and improved operating leverage via increase in 2W utilisation from the current sub-60% levels.

* SEL is aiming to reduce ‘net debt / equity’ from 0.55x currently to 0.4x by FY25 along with operating at 8-9% capex/sales ratio and subsequently increase the RoCE towards 20% with improved profitability. Thus asset sweating of the capex down in last couple of years with improved margin would help SEL improve its ROCE.

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