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Robust balance sheet, reasonable valuations present a lucrative investment opportunity: SMIL is a zero-debt company with cash and cash equivalents to the tune of Rs.397.6 cr and financial investments of Rs.56.5 cr as on March 31, 2022 that translates into Rs.152.7 per share as against the current market price of Rs.845.

Strong market share and healthy long-term relationships with OEMs to drive the sales going forward: SMIL is a prominent player in the Indian automotive components industry with strong presence in both the spaces – exhaust systems and suspension systems. The company has been manufacturing and supplying exhaust systems and suspension systems to leading OEMs for almost two decades now.

Exhaust Technology Pvt Ltd (JV) to play a pivotal role for the company going forward: The company had a negligible presence in the commercial vehicles segment (supplying to a few clients like Force Motors) before it formed its 50:50 joint venture with Germany based Eberspacher Exhaust Technology International GmbH i.e. Exhaust Technology Pvt Ltd.

High value products to drive the top-line growth going forward: As India took a leap from BS IV to BS VI to match the European emission standards and further new legislation norms which are coming in next couple of years will play as a tailwind for the industry and company. The need to upgrade the components accordingly require huge investments.

OUTLOOK & VALUATION

SMIL is a leading auto-ancillary company supplying exhaust and suspension systems to major OEMs. The new norms such as CEV Stage IV & V – applicable for Construction Equipment Vehicles & Off Highways equipment along with TREM IV & V and Real Driving Emissions and On-Board Diagnostics will drive the growth going forward. Further, the JV with Eberspaecher for production of exhaust systems for commercial vehicle segment is likely to drive the business. In addition, the company is debt-free, holds substantial cash and cash equivalents, has healthy return ratios & strong growth prospects. Looking forward, we expect company to witness value driven growth and rise in profitability on account of contributions from JV. We expect the company to deliver an EPS of Rs.77.6 in FY24; assigning a target multiple of 14x we arrive at a target price of Rs.1,087 showcasing an upside potential of 28.6% from current levels with an investment horizon of 18-24 months. Thus, we re-initiate our coverage on Sharda Motor Industries Ltd. (SMIL) with a BUY rating.

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