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JULY <strong>2016</strong><br />
STOCK PICKS<br />
in Gujarat with an initial manufacturing capacity of 1.5<br />
million alloy wheel rims. Kalink Co. has invested USD<br />
2million by subscribing equity shares in SSWL at Rs 640/-<br />
per shares through preferential allotment basis. Currently,<br />
alloy wheel market is growing at double digit CAGR and<br />
has 24% market share in passenger vehicle segment.<br />
Management expects that alloy wheel market share would<br />
increase to 35% by FY20. Increasing demand for alloy<br />
wheels led the shift happening from Steel Wheel Rims to<br />
Alloy wheels across all variants of passenger vehicle.<br />
During the year, SSWL has set up specially designed Hot<br />
Rolling Mill in Jharkhand, which has resulted in<br />
substantial savings in raw material purchase cost as SSWL<br />
used to source it from outside. Besides, company has also<br />
set up modern high tech steel process unit with monthly<br />
processing capacity of 20,000 tonne steel. Apart from<br />
captive consumption it will be undertaking steel<br />
processing for companies like Tata Steel ltd. and JSW<br />
Steel ltd. SSWL is likely to commence commercial<br />
manufacturing of alloy wheel by June 2017 & this will<br />
boost revenue & margin growth in coming years.<br />
Strong client base<br />
SSWL is enjoying strong relationship with most of the<br />
passenger vehicle OEMs in India and with the launch of<br />
alloy wheels it will be an additional offering to existing<br />
relationship. Company has a proven track record and its<br />
products are well accepted by OEM’s across the globe<br />
and SSWL has demonstrated flawless quality history.<br />
Company caters to marquee clients including TATA, Ashok<br />
Leyland, Daimler, MAN, VE Commercial vehicles, Swaraj<br />
Mazda, JCB, Mahindra Earthmaster, Escorts, L&T, Beml,<br />
Putzmeister, John Deere, Eicher, ACE, Suzuki, Piaggio,<br />
Honda, Scooters India ltd, hmt, Hyundai, Nissan, BMW,<br />
Renault, Mahindra, Jaguar, Land Rover, Volkswagen, Maruti<br />
Suzuki, Mahindra, Renault Nissan, Ssangyong and Dacia.<br />
SSWL is also a supplier to global OEMs & delivers to<br />
countries like Japan, Germany, UK, Brazil, Italy etc. with<br />
export contributing about 12% of total revenue. Strong<br />
client base ensures sustainable revenue growth for the<br />
company.<br />
Improving utilization rate<br />
Company has witnessed higher level of utilization across<br />
all facilities in last few years. The average utilization rate<br />
has improved from 56% in FY14 to 79% during FY16 led<br />
by higher utilization in CV and two/three wheeler<br />
segment. The savings utilization from is substantial in<br />
case of Jamshedpur facility from 37% in FY14 to 82%<br />
which is specifically for CV wheels. Also, revenue<br />
contribution from CV sales has increased from 15% in<br />
FY14 to 35% in FY16. Such increase in the sales of high<br />
margin products like CV wheels & tractor wheels has<br />
boosted the EBITDA margin which has improved from<br />
9.7% during FY14 to 12.3% in FY16. Company also enjoys<br />
strong pricing power, thus any increase & decline in raw<br />
material prices (steel) can easily be passed on the OEMs.<br />
Increasing capacity utilization rate on the backdrop of<br />
improving demand for cars/commercial vehicles would lead<br />
EBITDA margin expansion.<br />
Key Risk<br />
• Company is entering into new product segment i.e.<br />
alloy wheel which manufacturing is different from<br />
steel wheel rims, thus any delay in commercialization<br />
of the plant could derail the company’s long term<br />
growth plan.<br />
• Company derives around 12% of revenue from<br />
export, thus any volatility in currency and political<br />
instability in overseas markets could pose risk to<br />
SSWL’s financial metrics.<br />
Valuation<br />
SSWL is the leading steel wheel rim manufacturer in India<br />
c a t e r i n g t o d o m e s t i c a n d g l o b a l O E M s . I t h a s<br />
manufacturing capacity of 16.6 million units which<br />
company intends to increase it by 1.5 million by FY18.<br />
Though the new capacity addition will be alloy wheel rim<br />
which will be a new product for the company. Increasing<br />
demand for alloy wheel will lead the company to set up<br />
separate alloy wheel plant at strategic location in Gujarat.<br />
Passenger vehicle segment accounts 61% of its sales<br />
volume and there are near term triggers for passenger<br />
vehicle sector such as expectation of good monsoon and<br />
higher disposable income on account of seventh pay<br />
commission benefit. Further, company has witnessed<br />
improvement in utilization rate mainly in CV segment,<br />
which indicates recovery in domestic macros. On financial<br />
front, company has shown steady performance with 5%<br />
revenue CAGR in past 3 years. However, EBITDA and PAT<br />
had outpaced the revenue growth by growing at a CAGR of<br />
18% and 58% respectively. SSWL has maintained healthy<br />
balance sheet with gearing ratio at 1.3x during FY16,<br />
supported by strong operating cash flows. Given its<br />
healthy market share, ability to scale its operation and<br />
strong client base, we are optimistic about company’s long<br />
term growth story. Improving margin with better utilization,<br />
improving ROE and ROCE, new capacity expansion and<br />
market leader on the steel wheel segment will ensure<br />
steady wealth creation for investors. Hence, we<br />
recommend our investors to BUY the scrip for a target<br />
price of Rs 578 from 12-15 months investment<br />
perspective. Currently, the scrip is valued at P/E multiple<br />
of 8.2x on its FY18E EPS.<br />
16
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