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All set to double earnings in two years

We interacted with Sansera Engineering (SEL) management to understand the outlook on its business and its plans. Following are the key takeaways: a) Company is aiming at 15-20% revenue growth in FY23 amidst strong domestic demand recovery, weak exports and price hikes to combat input cost inflation; b) 2W component operation is running at ~50% utilisation, giving scope for margin and RoCE recovery with the scale picking up along with raw material cost reversal; c) Post reaching ~Rs900mn revenue in aerospace in FY23, SEL would be operating at 70% utilisation and looking towards revenue of Rs2bn by FY25 based on orderbook visibility and new plant getting ready in FY24; d) Company can increase Cummins revenue 4-5x from the current Rs850mn p.a. by opening a machining facility in the US, with forging and heat treatment getting done in India; capex for the US expansion is likely in FY25; e) Company is progressing beyond traditional e-2W forged parts to rotor shafts for e-PVs; it is supplying ~12k/month hybrid system components to Toyota for Grand Vitara / Hyryder, Hycross and exports, with per-vehicle value-addition at ~Rs3k; f) EBITDA margin is likely to go back towards the 18-20% range with business scaling up across 2Ws and aerospace along with falling input commodity and freight costs. With no change in estimates, we maintain BUY on SEL with revised DCF-based target price of Rs910, implying 16.5x FY25E earnings.

Key takeaways from our interaction with management:

* SEL consolidated revenue CAGR is expected at 32% in CY20-CY22E despite weakness in domestic 2W market and exports. The growth would likely be driven by revival in aerospace segment, introduction of EV parts, new order executions and price hikes to pass on cost inflation. In FY24-FY25, domestic 2W revival, rising mix of EV parts, new order execution and rising scale of aerospace is expected to drive revenue growth. Aluminium forging capacity of 3 presses is fully booked with peak revenue of Rs1bn p.a. and SEL will expand capacity with incremental confirmed orders. Earlier for Toyota models, forgings were imported by Toyota from Indonesia and SEL used to do only machining. Going ahead, value addition by SEL will increase by substituting a part of the forging too. Defence business is in a nascent stage and will move up the learning curve in coming years. (We are building-in ~20% revenue CAGR in FY23E-CY25E for SEL).

* SEL EBITDAM has declined from ~18-19% levels to ~16-17% currently, largely due to adverse operating leverage, with gross margin too being down marginally. With 2W parts utilisation set to improve from current lows of ~50%, rising mix of highermargin exports / aerospace, input material costs declining from FY23 highs, EBITDAM is expected to move back towards ~18-19%, in turn taking RoCE up from ~14-15% to ~18% levels. Company will operate with capex of Rs2.5bn-3bn p.a. in the near term with US-led capex to come only from FY25 onwards, hence incremental revenue from Cummins likely only from FY26 onward. Company will operate with sub-0.5x ‘net debt / equity’ without compromising on revenue CAGR trajectory of 20% in years ahead.

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