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Weakness to continue in the near-term; Orderbook shaping-up well

Uniparts India’s (Uniparts) reported revenue declined 18% YoY and was 9% below JMFe. Inventory correction during the quarter had an impact of 8-9% on revenue growth. EBITDA margin at 18.3% was below JMFe. Inventory correction is expected to bottom out in 3Q with normalisation in 4Q. While US small agri demand remains muted, large Agri and CE demand remains healthy. Demand in EU also remains steady. Uniparts continues to see good traction (increasing wallet share/adding new customers) owing to China+1 de-risking strategy adopted by global OEMs. While near-term volume is expected to remain soft, we expect medium-term growth to be driven by focus on value-added and adjacent products. Profitability is expected to gradually improve to normalised margin level of ~21% by 4Q. We expect revenue/EPS CAGR of 9% over FY23-26E. Strong positive FCF, 20%+ return ratios and net cash position provides comfort. Stock currently trades at ~11x FY25e EPS. We maintain BUY with Sept’24 TP of INR 750 (14x FY25e EPS). Slowdown in global OHV demand and inability to gain orders for allied products remain key risks.

* Revenue / margins below estimate: In 2QFY24, Uniparts reported revenues of INR 2.9bn (- 18%YoY, -1% QoQ), 9% below JMFe. EBITDA for the quarter stood at INR 536mn (-33% YoY, -10% QOQ). EBITDA margin stood at 18.3% (-390bps YoY, -170bps QoQ), 270bps below JMFe. QoQ decline in margin was due to higher other expenses. Adj. PAT in 2QFY24 stood at INR 330mn (-37% YoY; 11% QoQ). Capex during 2Q stood at INR 83mn.

* Demand Outlook: Performance during 2QFY24 was impacted due to inventory correction primarily in aftermarket channel (c.8-9% impact) and muted demand in US small agri market. The company expects inventory correction to bottom out in 3Q (with normalisation in 4QFY24). Management indicated that near-term operating environment remains mixed. US large Agri and CE OE demand remains strong while small Agri demand remain muted. OE demand in EU remains steady. However, company continues to see healthy order traction owing to China+1 de-risking strategy adopted by its customers. Company has won ~INR3bn worth new orders on TTM basis (vs. ~1.7bn annual run-rate pre-covid). Near-term volume is expected to remain soft owing to inventory correction. 3PL for large Agri & UTVs and adjacent products (Hydraulic Cylinders, PTO, etc.) remain key areas of opportunity in the medium-term.

* Margin Outlook: Gross margin improved by 100bps QoQ owing to lower RM cost and phasing out of high cost inventory. However, EBITDA margin declined by 170bps QoQ on higher other expenses. The company expects EBITDA margin to normalise by 4QFY24. Softening inflationary pressure and focus on value-added business is also expected to support margins going ahead.

* Other highlights: Pilot sales for UTV 3PL will be starting and ramp-up will be starting FY25. Margin on UTV 3PL is better than overall company margins.

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