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Steel Strip wheels ltd. (SSWL) reported net sales of INR 1133 Cr in 2Q FY24 (~4.9% increase on YoY basis) and PAT of INR 52.4 Cr (~4% decline over YoY basis). EBITDAM excluding other income stood at 11%, was flat on YoY basis. Increase in Employee cost by (up by 179bps) was largely offset by improvement in gross margin (improved by 212 bps) while other expenses increased by 19 bps. We expect the margin to improve with the help of increasing alloy wheel production and better exports. SSWL increased borrowings to fund alloy wheels expansion (preponed to meet high demand) & other projects. This increased finance cost & reduced other income; hence PAT was lower by ~4% to Rs 52 Cr. The company has started to see recovery in its export segment. We expect this export growth to continue, and we see exports of INR 550 - 600 Cr for FY24.

Unleashing Growth as High Margin Alloy Wheels Fuel Success

Leveraging the high-margin potential of alloy wheels, the company is now poised to enhance its capacity significantly, with plans to scale up from 3Mn wheels to 4.5Mn wheels at its Mehsana Plant in Gujarat during FY24. Notably, the company is also exploring lucrative opportunities to supply alloy wheels to MSIL

Over the years, revenue contribution from the alloy wheel segment has displayed a remarkable ascent, climbing from 7% in FY20 to an impressive ~31% in FY23, and this upward trajectory is expected to continue. The alloy wheels will play an even more substantial role in their product mix moving forward. Looking ahead, the company's medium-term vision involves scaling its alloy wheel capacity up to an impressive 10 million wheels. This strategic capacity expansion to 4.5 million wheels is projected to yield substantial gains in revenue and EBITDA margins, given that the realization of alloy wheels is approximately 3-4 times higher than that of steel wheels. Moreover, with an already secured order book, the company is well-positioned to capitalize on this expansion. Looking to the immediate future, the company foresees a promising sales surge in aluminium products, signalling a positive trend in the aluminium market. As the company diligently steers its growth trajectory in the alloy wheel segment, it is evident that strategic decisions and forwardlooking plans are set to drive remarkable success and market dominance in the industry

Other Highlights

SSWL will get revenue from AMW Autocomponent's plant at the start of FY25. The plant has ~7mn units per annum steel wheels capacity, and the plan is to gradually start a few production lines.

Capex- FY24: Rs 320 Cr is expected to be spent on standalone business and additional Rs 140 Cr would be spent on AMW acquisition. Total capex of Rs 460 Cr is to be done in FY24. The standalone capex will be spent on alloy wheels expansion, Knuckle casting, renewable energy, automation, maintenance, etc. Expected asset turn once all capex will get over is 3-4x.

Effective tax rate: is expected to move to the new tax regime from FY25.

Trade receivables increased in H1FY24 is due to higher exports.

On the EV controllers business, the discussions are on-hold due to conditions in Israel

Outlook

Armed with multiple growth drivers and margin expansion opportunities, the company is poised for both volume growth and increased profitability. We expect Volume/Revenue/Ebitda to grow at CAGR of 13%/17%/26% respectively over FY25E. Considering the ongoing change in mix of higher margin alloy wheels and export which are expected to fuel further growth, we maintain BUY with target of Rs 351 valuing stock 15x its FY25E EPS of Rs 23.

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