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Vehicular emission norms to propel future growth

With the upcoming implementation of the CEV-V (Construction Equipment Vehicle) norms in January 2025, the management expects that the products of Sharda Motor Industries Ltd (SMIL) will be required for majority of the off-highway segment, and subsequently may lead to a potential increase in the target addressable market. Similarly, with the BS VI OBD (On Board Diagnostics) Phase 2 norms coming into effect in April 2023, it has slowly started to reflect on the financials of the company. With the implementation of RDE norms, the company has witnessed an increase in content per vehicle by 10-15% in the recent quarters.

Exports and strategic partnerships to drive business growth

The management of SMIL recently announced that they won a crucial export order for emission components to the US market, which has a potential business of $7 million annually and $40 million of lifetime business. The company has various other developments in the pipeline on the export front, and the management believes it could be a pivotal revenue lever  going forward.

Sharda Motor Industries Ltd. and Eberspaecher Exhaust Technology International inked a joint venture agreement in the category above 4 litre CVs in India. The rationale behind the JV was to provide customers with the local market expertise of SMIL, coupled with Eberspaecher’s cutting-edge global technology and production know-how, leading to reduced emissions. This JV will help the company substantially increase its addressable market as well as content per vehicle.

Robust fundamental metrics

SMIL is a debt-free corporation with close to Rs.800 cr in cash and investments as on Q2FY25. The management stated that their cash surplus would likely be utilised for lucrative M&A opportunities, if any, in powertrain agnostic products. Coming to other key financial metrics, the company is currently trading at a PE of 19, which is well below the industry average, along with an extremely healthy ROE of 30% and ROCE of 39%.

OUTLOOK & VALUATION

Factoring the various growth triggers for Sharda Motor Industries Ltd, along with robust fundamental metrics, we expect FY26 revenue at Rs.3047.0 cr, EBITDA at Rs.435.8 cr at an EBITDA margin of 14.3% and Adjusted PAT of Rs.381.8 cr. Given the strong growth outlook, we estimate FY26E EPS at Rs.133.0, and assign a PE multiple of 19x to arrive at a target price of Rs.2,527, which is an upside of ~25.8% from its last traded price of Rs.2,009. We re-instate coverage on Sharda Motor Industries Ltd. with a BUY rating, over an investment horizon of 18-24 months.

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