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Our Take:

Steel Strips Wheels Ltd (SSWL) commands a leadership position in the steel wheels segment with an overall market share of ~50-55% and ~20% in the alloy wheels segment. The company has witnessed strong demand over the past few quarters and it is expanding its steel as well as alloy wheels capacity to meet the increasing demand. It is concentrating more on alloy wheels and export segment both of which are higher margin segment and expects these segments to contribute ~50% of revenue in 3-4 years from 35% in FY21.

Globally the alloy wheel market is of ~35cr wheels p.a. and SSWL is eligible to participate in global RFQ. Furthermore, the company could also explore inorganic expansion for steel wheel rim capacity in the near term. It has already announced resolution plan for acquisition of AMW Autocomponent (AACL) under corporate insolvency resolution process that has been approved by the committee of creditors of AACL as on 21Sep-2021.

As per the management, any inorganic growth opportunity would be largely funded by internal accruals. Healthy offtake of the enhanced capacities will remain key to the elevation in profitability and return on capital employed, as well as deleveraging. India’s passenger vehicle industry is showing strong signs of growth driven by changing demographic profile of buyers, higher per capita income and easy availability of finance. Share of alloy wheels is on the rise due to increasing premiumisation.

Recovery in CV industry and strong growth in export orders should drive the company’s growth. SSWL has strong growth visibility from the export market which has resulted in increased order inflows thereby reducing its dependence on domestic OEM demand. Exports contributed to around 26% of the revenue in Q1FY22 (FY21: 15%; FY20: 14%). Despite firm raw material prices, ramp-up of exports business has led to EBITDA margin of 14.4% in Q1FY22 v/s Q4FY21: 12.3%; Q3FY21: 12.5%. SSWL has invested heavily in recent years to stay ahead of the competitors especially in the alloy wheels segment. The long-standing relationships with OEM manufacturers would benefit the company to keep facing competition.

Valuation & Recommendation:

We expect SSWL’s revenue/EBITDA/PAT to grow at 48/59/138% CAGR over FY21-FY23, led by the increased demand from the domestic automobile industry and higher contribution from alloy wheels and export segment. Upgrade in credit rating and repayment of debt would aid in increasing profitability. We expect RoE to improve from 6.8% in FY21 to 26.3% in FY23.

The Board has approved split in the face value of the stock from Rs 10 to Rs 5 and the record date for this may be announced shortly. We believe investors can buy the stock in the band of Rs 1710-1740 and add on dips to Rs 1510-1530 band (8.5x FY23E EPS) for a base case fair value of Rs 1877 (10.5x FY23E EPS) and bull case fair value of Rs 2056 (11.5x FY23E EPS) over the next 2 quarters.

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