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Catalysts in place for earnings growth acceleration

Sansera Engineering’s (SEL) earnings remained hovered around Rs400mn/quarter
throughout FY22-FY23 due to weak demand from domestic 2Ws / export markets
impacting earnings growth. We interacted with the management to understand their
outlook on business and their plans. Following are the key takeaways: a) Company is
confident of delivering ~20% revenue CAGR in FY23-FY25 amidst: (a.i) recovery in
export markets (likely >40% growth in FY24), (a.ii) recovering domestic 2W market,
and (a.iii) expanding aerospace business (~50% revenue CAGR in next 3-4 yrs). b) 2W
component operations are running at ~55% utilisation providing scope for margin and
RoCE recovery. c) Will be looking forward to execute new orders for global PV OEMs
(such as an EV major from the US, JLR under exports, and Tata Motors in India) from
FY24. d) Plan for machining facility in the US w.e.f. FY25 is on (envisaged capex:
~Rs800mn) though it would be on lease basis. It would help SEL’s revenue from
Cummins to increase 4-5x from the current Rs850mn p.a. e) EBITDA margin is likely
to return to the 18-20% range with business scaling up across 2W and aerospace
segments, in parallel with falling input commodity and freight costs. Rise of exports,
aerospace business and EV parts in the overall revenue mix will likely enhance
EBITDA margin for SEL. Maintain BUY, keeping estimates unchanged and DCF-based
target price of Rs939 (earlier: Rs910). The target price implies 16.5x FY25E earnings,
with the increase in valuation led by earnings rollover in our DCF by a quarter.

Key takeaways from our interaction with management:

* SEL is confident of delivering >20% revenue CAGR in FY23-FY25E post delivering a
mere 9% in FY19-FY23E. The confidence stems from its anticipation of key business
drivers (e.g. domestic 2Ws, export markets, aerospace business) to recover
simultaneously in FY24-FY25. Led by new export orders under aluminium forging, EV
shafts and overall recovery in market conditions, SEL is expecting >40% growth in its
export revenue in FY24 (currently at ~20% of revenues). Domestic 2Ws, which account
for ~40% of revenue, also seem to be on the verge of revival, going by improving retail
numbers and outlook on production schedule by various OEMs. We believe, revival in
the export portfolio for domestic 2W makers, would also help SEL improve its revenue
outlook (2W exports contribute ~15-20% of the total 2W production in India). With 50% of
the orderbook being from non-ICE dependent products currently, including ~18% from
EV products, SEL is set to move towards a more diversified product mix going ahead vs
a whopping ~80% of revenues coming from ICE products currently.

* SEL management expects EBITDAM to move back to the range of ~18-20% in FY24-
FY25 on back of: a) operating leverage benefit returning with multiple catalysts for >20%
revenue CAGR in FY23-FY25; b) aerospace segment revenue expected to witness
~50% revenue CAGR in next 2-3 years, thus enhancing share of the higher-margin
segment ahead (capex for this segment has largely been done to drive the anticipated
level of growth); c) scale of higher-margin processes (e.g. aluminium forging) to pick up
ahead led by rising electrification. This should result in focus towards lightweighting and
new orders from global 2W majors like Ducati, KTM, BMW, etc

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