Buy Sandhar Technologies Ltd for the Target Rs.825 by Emkay Global Financial Services Ltd
We initiate coverage on Sandhar Technologies (STL) with BUY and TP of Rs825 (implying 51% upside), based on 20x Dec-27E PER (in line with the LTA). STL has been through a deep capacity build-out phase (over FY21-25) via both organic and inorganic routes. We believe STL is now ready to reap the benefits of its past investments, with the peak-capex phase now behind (capex intensity to moderate to ~4.5-5% of revenue over FY26E-28E vs ~9% average during FY21-25). This is led by its widening ADC portfolio (~5x domestic revenue over 5Y), scale-up of sheet-metal segment (3.5x revenue over 5Y), premiumizationled growth in smart locks (~10x ASP potential vs mechanical), and incubated EV portfolio, with revenue already flowing in (Rs69mn - H1FY26). Also, early signs of recovery in the overseas portfolio (Q2 losses halved vs Q1; targets breakeven by Q4) and a profitable JV footprint (all 5 JVs PAT-positive since FY24) have reduced the drag. We model in 14/20/22% revenue/EBITDA/EPS CAGR over FY26E-28E. STL trades at 12x its Dec-27E PER and at 54% discount to peer average (~26x), offering an attractive risk reward.
A diversified auto-ancillary player with a strong 2W base Sandhar operates across sheet metal (19% of FY25 revenue), die-casting (25%; 31% post-SCL acquisition), locks (20%), mirrors (5%), assemblies (11%), and cabins (14%), serving 2Ws (62%), PVs (16%), and OHVs (14%). ADC (~5x its domestic revenue over 5Y) and sheet metal (~3.5x revenue over 5Y) have emerged as core growth engines led by targeted capex in 4 sheet-metal plants, new machining lines at Hosur/Mysuru, and ADC facility at Pune – these have upgraded STL’s capabilities over the years (2x gross block expansion in last 5Y). Premiumization via smart locks (10x ASP vs mechanical; 2 anchor clients already secured) and STL’s incubated EV portfolio, with revenue already flowing in (Rs69mn in H1FY26), are seen as added growth levers once scaled up.
Reset under way: overseas losses halved; all 5 JVs now PAT-positive Overseas operations caused a major drag in FY25 (-7% YoY revenue growth); however, repricing/SKU cuts/labor optimization meaningfully reduced EBITDA losses (now half vs Q1) and breakeven is targeted by Q4FY26. On JVs, STL exited loss-making partnerships (Jinyoung, Kwangsung) and focused on the 5 remaining core JVs (aligned with PV electronics, antennas, ADAS, smart locks), which have been PAT-positive since FY24 (H1FY26 JV revenue: +69% YoY) with 5% PAT contribution over FY26E-28E (FY23: -4%).
Build in 22% FY26E-28E EPS CAGR; RoCE inflection ahead; valuation attractive As capex intensity moderates to ~Rs2.5-3bn (~4-5% of revenue in FY26-28E vs 9% on average, at peak), RoCE would improve from a single digit (~7-8%) to ~16% by FY28E. We believe net debt-to-EBITDA will soften to ~1.2x by FY28E (2.9x/2.2x in FY22/25), on EBITDA ramp-up (FY26E-28E CAGR: ~20%) post-SCL integration, overseas cleanup, and positive FCF (negative 7% yield on market cap during peak capex, positive from FY26; ~6% by FY28E). STL trades at 12x Dec-27E PER and at a steep 54% discount to the peer average of 26x; we believe that its valuation gap with peers should narrow going ahead.
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