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High valuation-recommend sell.

Gabriel India Ltd. (GIL) is one of the leading manufacturers and is engaged in producing ride control products, which include shock absorbers, struts, and front forks in every automotive segment.

* We expect the EV order book to be normal for the year due to the reduction in the subsidy and high scrutiny by the government to avail the PLI benefit.

• EV sales form almost 9% of the total sales, up from 3% last year. The company’s market share in EVs stand at over 60%, and it serves all the top models. OLA, Ather, TVS, Ampere and Okinawa.

* In Q1FY24, revenue grew by 12% YoY due to superior product mix and price hikes, driven by consistent growth in aftermarket sales and strong growth in the export market.

* EBITDA improved by 151bps YoY due to commodity price stabilization and an increased share in the EV mix.

* The stock has rallied 88% in the last one year and is trading at 25x on a 1yr fwd. basis. Considering this, we expect some consolidation in the near term. We recommend Sell rating at CMP (20x FY25E EPS). 

EV order to normalize for the fiscal year

We expect the EV order book to be normal for the year due to the reduction in the subsidy and high scrutiny by the government to avail the PLI benefit. As a result, there was a 50% reduction in EV new bookings for the months of June and July. The company’s market share in EV stands at over 60% and serves all the top models (OLA, Ather, TVS, and Ampere & Okinawa, and Okinawa) and holds a cent percent market share in suspension. EV sales form almost 9% of the total sales, up from 3% last year. GIL's foray into e-bicycle, which are becoming very popular in Europe, has received an order from Hero Cycles Export and is optimistic about future demand.

Current order book to outperform industry growth

Q1FY24 revenue stood at Rs806cr (12%YoY), primarily driven by improving volume with key customers, offering new products, and strong aftermarket growth. EBITDA came in at 8.6%, expanding by 159bps YoY due to commodity price stabilization and price hikes. Despite muted growth of 4% YoY, the 2W segment (constitutes 61% of the revenue mix) was supported by strong order back from EV and robust customer leverage. In terms of channel mix, export and replacement channels improved from 2%/11% to 4%/13%, respectively. The company has crossed Rs.100cr revenue from exports for the full year and will grow by 20% in next 2 years with the new order from Hero Cycle for E-bicycle, & new order win from DAF Netherland. With the gross margin largely stabilizing at 25%, the company reiterated that the margin will regain 10% going forward.

JV with Inalfa to manufacture sunroof systems

Gabriel, India's top suspension manufacturer, is teaming up with Dutch sunroof specialist Inalfa to produce sunroofs for passenger vehicles in India (Technical licensing partnership). The Gabriel-Inalfa alliance will set up a production line near Chennai with an annual capacity of 200,000 units by the first quarter of 2024. initially serving Hyundai and Kia. Gabriel aims to diversify its offerings beyond shock absorbers, capitalizing on India's growing sunroof market. Inalfa, with 25% global sunroof market share, plans to localize sunroof production in India, expecting significant growth, especially in SUVs. The venture could generate up to ?1,000 crore in revenue by 2030. This expansion reflects Gabriel's strategic adaptation to automotive trends in India.

Valuations

Gabriel’s expansion in the EV space will support volume growth in the long run. The group formed a separate subsidiary called “ANEVOLVE” EV to expand EV products through partnerships. Under the Anevolve EV division, the company signed 3 JVs with Japanese, Israel and UK companies for motors, controllers, batteries, chargers, etc. However, we foresee a near-term slowdown in new orders due to stricter regulation in the EV space. With the stock's 88% surge in the past year and touching a high P/E of 35x we expect some consolidation in the near term. On a 1 yr fwd. the stock is trading at 25x which is slightly expensive at CMP. we recommend Sell rating and value the stock at 20x FY25E EPS with a revised target price of Rs.275.

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