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In Q1FY25, Steel Strips Wheels Ltd (SSWL) reported a topline of Rs 10.2 billion while achieving a robust EBITDA margin of 11.1%, signifying one of the best performances in the past six quarters. This margin enhancement is largely attributed to declining steel prices and effective cost rationalization, as evidenced by a 7% YoY reduction in other expenses. Although the finance cost surged by 32% YoY and 11% QoQ to Rs 311 million due to rising interest rates, this impact was mitigated by a lower effective tax rate of 25.4% compared to 33.2% in the prior year. Despite a challenging export mix, which saw a 20% YoY decline in exports to Rs 1.23 billion, operational performance remained commendable. Other income decreased from an atypically high Rs 72 million in Q4FY24 to Rs 39 million in Q1FY25, contributing to a QoQ dip in PAT. Notably, EBITDA per wheel has improved significantly to Rs 248 in Q1FY25, with expectations to reach Rs 256 in FY25 and Rs 268 in FY26, excluding the Knuckle Casting segment.

Expected Recovery in Exports:

The management is confident of a significant recovery in export performance over the next three quarters. In the first quarter, the company experienced challenges, particularly with logistical issues related to freight and container availability, along with a notable slowdown in the U.S. market, which is typical due to seasonal variationsin product demand.Despite these challenges,the ongoing U.S. elections, characterized by a generally anti-China sentiment regardlessofthe government, are expected toenhance Indian supply opportunities,making the anticipateddemandfromtheU.S.resilient

Performance of Alloy Wheels and OEM Relationships:

A downturn in alloy wheel sales was witnessed this quarter, which can be attributed to the postponement ofstart-of-production (SOP) timelines for certain original equipment manufacturers (OEMs). This has created a ripple effect on sales volumes, limiting growth in the alloy segment. However,the company is optimistic aboutfuture demand, noting that the trend seen in aluminium wheels will also extend to alloy knuckles, an area they plan to launch in Q3 FY25, anticipating a gradual improvement in market conditions.

Significant Capacity Expansions:

The company is pursuing capacity expansion and production growth initiatives aimed at increasing monthly output. The Jamshedpur plant is undergoing upgrades with the integration of equipment from AMW. The entire project is slated for completion by the end of Q3, with the objective of optimizing operational efficiency and elevating utilization rates to 90% after bringing production capacity to 2.1 lakh from current 1.6 lakh. The installation of AMW's state-of-the-art machinery is anticipated to streamline production processes and substantially reduce operational costs, thereby enhancing the economic viability of the expansion. Additionally the management is confident in the adoption of alloy wheels, despite current sales falling short of expectations due to OEM cost pressures. For this the company has planned to boost alloy wheel production to 4 lakh units per month from the current capacity of 3.6 lakh by the end of FY25..

Market Dynamics in Steel and Alloy Wheels:

The company initially expected a 40% increase in the alloy wheel segment; however, a combination of sales challenges in high-end models hasresulted in a 37% growth. However, the management is citing that in near term as consumer preferences will shift towards heavier, more stylish vehicles, the demand for alloy wheels will likely increase. Inthemeantime,the steelwheelsegmentis expected to sustain support for entry-level vehicles, allowing the company to balance its portfolio amidst evolving market demands

Outlook & Valuation:

With multiple growth drivers and margin expansion potential, the company is well-positioned for robust volume growth and increased profitability. We project Volume/Revenue/EBITDA to rise by 9%/13%/36% over FY26(E). The ongoing shift toward highermargin alloy wheels and increased exports will further fuel growth. Thus, we assign a HOLD rating with a target price of INR 356, valuing the stock at 22x FY26(E) EPS and 10.4x FY26(E) PE.

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